Microsoft appears to be adopting a vertical expansion strategy by leveraging Xbox as a means to maximize the full potential of their cloud technology
With a nearly seven-year gap, 「Sony's PlayStation」 had already established its presence in the market, enjoying a competitive advantage. However, 「Microsoft's Xbox」, propelled by commercially successful titles like 「Halo」 exclusive to its console, managed to stay in close contention. While it remains indisputable that 「PlayStation」 consistently outperformed 「Xbox」 in sales, the latter's strategic moves and exclusive titles have ensured a resilient standing in the gaming industry.
While it might appear that these two companies are engaged in the same battle as they were almost 20 years ago, they are, in fact, strategically addressing their challenges from entirely different perspectives.
Before we embark on this exploration, it is crucial to contextualize Microsoft's historical evolution.
Microsoft's Strategic Transition
When the first iPhone was introduced to the public in 2007, it elicited astonishment from many; however, Microsoft's reaction was quite distinct. In fact, their exact response was "It doesn't appeal to business customers because it doesn't have a keyboard. Which makes it not a very good email machine... We are very happy with Windows Phone devices on the market today.”
[Worldwide Smartphone Unit Shipments to End Users]
I, too, concur that anticipating the smartphone industry's growth to almost 5.5 times its size within a mere five years would have been deemed impractical. However, events unfolded as they did, and Microsoft eventually entered this competitive landscape, albeit at a later stage. The long-term vision articulated by 「Steve Ballmer」, the former CEO of 「Microsoft」, aimed at transforming the company into a 'Devices and Services' entity and this strategic vision materialized through Microsoft's acquisition of Nokia's mobile device business in a deal valued at almost 5.5 billion USD. Nevertheless, Windows Mobile began losing market share, culminating in the decision to sell 「Nokia」 back to 「HMD Global」 and the subsequent closure of its mobile business in October 2017.
[Sales of Microsoft/Nokia Smartphones based on Windows and Symbian]
Following Steve Ballmer's resignation, Satya Nadella assumed the role of CEO. As a former executive vice president of Microsoft's cloud and enterprise group, Nadella played a pivotal role in spearheading significant projects, including the company's transition to cloud computing and the establishment of one of the largest global cloud infrastructures. 「Microsoft」 has undergone substantial growth through strategic acquisitions of cloud-focused companies, nearly doubling in size from 2017 to 2022. Currently, the company holds the position of the second-largest entity in the cloud industry, trailing behind 「Amazon」, with the cloud computing business contributing to almost 50% of the entire revenue.
[Microsoft Cloud Annualized Revenues]
Why Game Business?
ⓐ Is Microsoft expanding its footprint into B2C (Business-to-Consumer) ventures?
While this hypothesis holds merit under the condition of a contraction in the cloud computing industry and the necessity for 「Microsoft」 to diversify its revenue streams, current market projections indicate otherwise. The Global Cloud Computing Market, valued at USD 546 Billion in 2022, is anticipated to surge to USD 2,321 Billion by 2032. The market is poised for significant expansion, projected to grow at a Compound Annual Growth Rate (CAGR) of 16% from 2023 to 2032.
Microsoft's strategic pivot toward B2C business expansion seems inevitable in the near future, however, it cannot be considered the sole rationale behind Microsoft's ongoing and substantial investments in the gaming industry.
(Microsoft boasts the highest B2B brand value globally, standing at $137.5 billion, constituting 72% of its total brand value of $191.6 billion. Microsoft's prominence in the Brand Finance Global Most Valuable B2B Brands 2023 Index is evident, with its B2B brand value nearly doubling that of the second-highest ranked brand, Amazon, which holds a B2B brand value of $70.6 billion.)
ⓑ Does Microsoft view cloud gaming as a pivotal avenue for generating new revenue streams within the gaming portfolio?
Several industry leaders, such as 「Google」, 「Amazon」, and 「NVIDIA」, foresaw cloud computing as the future of gaming—a strategic pathway for expanding their customer base by overcoming the hardware limitations prevalent in certain regions of the world. Despite this foresight, these companies encountered common challenges contributing to the lack of success in their ventures, which extended beyond issues of latency and sub-optimal graphics delivery.
A notable factor was the unsuccessful delivery of compelling titles, ones that would attract customer interest. Consequently, Microsoft's strategic acquisitions of major game companies could be perceived as a proactive measure to address this critical challenge, ensuring a robust and enticing content library for their cloud gaming platform.
Nevertheless, the assertion that Microsoft's primary objective is to expand its customer base through cloud gaming appears to be undermined by the substantial financial commitments made in acquiring these companies.
Mojang for 2.5 billion USD
ZeniMax Media (Bethesda) for 7.5 billion USD
Activision Blizzard for 68.7 billion USD
A plausible explanation could be that Microsoft aimed to fortify Xbox as a predominant gaming platform, thereby capitalizing further on their cloud technologies.
One of the fundamental advantages of cloud gaming lies in its cross-platform availability.
While the prevailing app market model is confined to mobile devices, the potential success of 「Microsoft」 in consolidating the PC, console, and mobile markets could serve as a magnet for game developers and publishers, offering a unified and expansive ecosystem.
Moreover, should these companies agree to utilize Microsoft-owned servers to host their games, it could have a direct impact on Microsoft's overall revenue.
Nevertheless, to captivate their potential customers, Microsoft must prove their competence by demonstrating complete resolution of pre-existing issues by receiving positive feedback from global gamers, and this process required a portfolio of commercially renowned titles to attract a broad audience. Also, through strategic acquisitions, Microsoft aims to directly engage with developers, facilitating optimization processes and resolving technical challenges in cloud gaming. Addressing these issues is pivotal in overcoming potential barriers and ensuring the successful realization of their envisioned projects.
In Summary,
Microsoft appears to be adopting a vertical expansion strategy by leveraging Xbox as a means to maximize the full potential of their cloud technology.
Possibly, this could explain Microsoft's seemingly indifferent stance towards losing exclusivity on Call of Duty as part of their agreement with Sony.
In a recent interview, 「Phil Spencer」 conveyed that "I can fairly safely say that if we do not make more progress than this off of console, we would exit the gaming business. If this were the outcome, we would—I don't believe we'd still be in the business." which could be indicative of the project's impending deadline.
