Microsoft vs. Sony and the Gaming Industry

Earlier this year, software giant Microsoft Corp. announced plans to buy gaming company Activision Blizzard for $69 billion. If Microsoft closes the deal, it will be the largest tech acquisition in history, and it will propel Microsoft further into an increasingly popular and lucrative industry: gaming. 

The acquisition, which regulators must first approve, would give Microsoft ownership of Activision Blizzard’s catalog of games, which includes Call of Duty, Candy Crush, and World of Warcraft. In recent years, under the leadership of CEO Satya Nadella, Microsoft has been expanding its gaming business, acquiring Mojang for $2.5 billon and ZeniMax Media for $7.5 billion. 

Microsoft isn’t the only company investing in gaming. Shortly after Microsoft announced its acquisition of Activision Blizzard, electronics multinational Sony Corp. said it would pay $3.6 billion to acquire Japanese company Bungie, which created games Halo and Destiny. Also in January, game developer Take-Two Interactive, based in New York, announced it would buy Zynga, the creator of the social network game FarmVille, for $12.7 million. 

Meanwhile, companies known more for their tech presence than gaming such as Netflix and Meta (formerly Facebook) are investing in the video game and virtual reality business. 

What is the gaming industry about? 

Gaming includes companies that make the hardware and software used to play electronic games and sports on TVs, computers, and phones. The earliest forms of video games appeared in the late 1950s and early 1960s, and the industry really took off in the 1980s, with the invention of Nintendo’s Nintendo Entertainment System, a home gaming console. From there, companies began building handheld systems, like Nintendo’s Gameboy, and later, games for smartphones that can be played with internet access. 

The revenue of the global video game business is estimated at more than $180 billion as of 2020, more than that of the global film industry, with revenue of $100 billion in 2019, and the $75 billion earned by North American sports in 2020. 

While video games have been popular with kids and adults for decades, they’ve become even more so during the Covid-19 pandemic, as people seek a way to stay connected and entertained. In fact, while the Covid-19 pandemic has decimated many other industries, revenue for the gaming industry is expected to increase to $314 billion by 2026.

The biggest players in gaming

China has the biggest gaming market of any country, with total sales of $40.8 billion. The U.S. follows close behind, generating $36.9 billion in gaming revenue during 2020. In the U.S., gaming employs about 298,000 people, and that number is on the rise. 

Traditional gaming companies such as Sony, Microsoft, Nintendo, and Electronic Arts still dominate the market: 

• Sony makes popular games such as The Last of Us, Marvel’s Spider-Man, and God of War. This Japanese company has also made four iterations of its own game console, PlayStation. For the fiscal year ending in March 2021, Sony reported $25.03 billion in revenue from its games and network services unit. 
• Microsoft makes the gaming console XBox, as well as popular games Halo, Minecraft, Ages of Empire, Microsoft Solitaire, and Microsoft Flight Simulator. The company reported $3.6 billion in gaming revenue for the third quarter of 2021. 
• Japanese company Nintendo develops games like Mario Kart and Animal Crossing, as well as consoles like the Nintendo Switch, which became very popular during the pandemic. In 2020, Nintendo brought in $12 billion in revenue.
• Electronic Arts is based out of the U.S. and makes games like Madden and FIFA. Electronic Arts’ fourth-quarter revenue amounted to $1.35 billion in 2021. 

A new breed of competitors

Microsoft’s acquisition of Activision Blizzard could shake up the current gaming landscape. Microsoft, which is the second largest company in the U.S. with a  market capitalization of $2.6 trillion, would become the third-largest gaming company by revenue, behind Sony and Tencent. The deal might also allow Microsoft to make certain Activision Blizzard games available exclusively to Microsoft customers to play on an XBox, which would cut into the business of competitors like Sony. Microsoft hasn’t named Activision Blizzard games that it might make exclusive to Xbox, but Microsoft currently offers exclusive games such as Halo Infinite, Sea of Thieves, and Gears 5. 

Amazon is also jumping on the gaming train. The tech giant has developed its own gaming system called Luna, using its cloud platform, Amazon Web Services, to host games. Players can stream high-resolution games over broadband and wireless connections. And Netflix, known more for streaming television shows and movies, said in July 2021 that it would start developing a gaming line of business, bringing on gaming executives from Facebook and Electronic Arts. Netflix hopes to offer “the absolute best in the category,” according to co-CEO Reed Hastings.  

AR, VR, and the Metaverse

Another motivation for Microsoft’s purchase of Activision Blizzard is reportedly to migrate into the “metaverse.” The metaverse is a much-hyped concept that people will increasingly be able to do in-person activities like playing games, attending shows, and watching sporting events as three-dimensional virtual experiences. Big tech companies have started exploring the potential of the metaverse, with Facebook even changing its name to Meta Platforms in 2021. Some experts have said the future of gaming may be virtual reality (VR) and augmented reality (AR) games. Beyond Facebook, companies such as Google, Microsoft, and Samsung have invested billions of dollars in developing equipment and technology for VR and AR.

So far, Meta has been the leader in VR and AR, holding 75% of the market share for headsets. Meta was an early adopter, acquiring VR tech company Oculus, which makes headsets, for $2 billion in 2014. Sony is developing a second generation version of its PlayStation VR. Microsoft released its headset, the HoloLens AR, in 2015, while Snapchat introduced its Snapchat Spectacles in 2021. Samsung, which released its Gear VR headset in 2017, has been relatively quiet since. 

There are also smaller startups working within this space. Magic Leap, with more than $1.4 billion in investments from companies such as Google, has developed mixed reality technology, which allows users to see virtual reality laid over their surroundings. Apple purchased VR startup Next VR in 2020 for an estimated $100 million. 

In the last few years, companies have found the development of VR and AR equipment to be expensive and consumers have found the equipment less than user-friendly. For those reasons, sales of VR equipment have been somewhat disappointing, but there’s still a lot of optimism around the future of the technology. Sony, for example, sold 5 million units of its PSVR headset in 2016 after launching, 1 million fewer units than anticipated. However, in 2020, sales of Facebook’s Oculus Quest 2, and the Valve Index increased 19%.

How to invest in gaming companies 

With Stash, you can invest in gaming companies. You can buy shares of companies leading the industry, including Sony, Activision Blizzard, Nintendo, Tencent, and more. Or you might consider investing in gaming-themed exchange-traded funds, such as Stash’s Video Game All-Stars, which includes investments in Tencent, Sea, and Nintendo, as well as computer chip companies Nvidia and Advanced Micro Devices, that make those games possible.