Will Microsoft Beat Sony in the Console War?

Since the first Xbox console launched in 2001, Microsoft (MSFT -1.24%) has sold fewer units in every console battle than Sony‘s (SONY -0.06%) PlayStation, but the tide may be turning. 

Year to date, Sony’s PlayStation 5 (PS5) and Microsoft’s Xbox Series X and Series S consoles have been locked in a tight battle. In July, PS5 outsold Xbox in Japan and Europe, but Xbox sold more units in North America, according to video game tracker VGChartz.

To date, PS5 has sold 21.8 million units, compared to 16.1 million for Xbox Series X/S. In the previous console generation, the PS4 outsold Xbox One by more than two to one. The ratio is much narrower this time around, and there are a few important reasons Microsoft has a legitimate shot at dethroning Sony in the console war.

Microsoft is fighting more aggressively

Gaming is shifting away from hardware dependence (e.g., consoles and PCs) to a multiple platform distribution strategy. More gamers are signing up for cloud gaming subscription services, which provide a wide selection of titles. These services are placing more importance on each company’s game catalog to attract subscribers.

Providing gamers with the best catalog of exclusive games has always been an advantage for Sony, which owns several studios that have a reputation for developing great gaming experiences. But Microsoft has a major financial advantage over Sony, and it’s starting to put that strength to use.

Microsoft has made several acquisitions in recent years to stack more developer talent at Xbox Game Studios. As it turns out, the $7.5 billion acquisition of Bethesda owner ZeniMax Media in 2020 was just a warmup. Microsoft is about to deal a damaging blow to Sony with the $68.7 billion offer to buy out Activision Blizzard, one of the largest gaming companies in the world. The deal is expected to close during Microsoft’s fiscal 2023, ending in June. 

If the winning parameters in the gaming battle between Sony and Microsoft weren’t already obvious, they should be now. Microsoft stands to beat Sony by offering gamers the most comprehensive catalog of the biggest franchises in the industry. Instead of selling more consoles, Microsoft could win by enlarging its base of Xbox users — and growing its Xbox Game Pass subscription service is a big part of that strategy.

In 2021, Microsoft’s Xbox Game Pass subscription service grew 67% to reach 25 million users, according to Statista. Sony’s PlayStation Plus is twice as large but only added 2 million new subscribers last year. These Netflix-style gaming services are the future battleground of the industry, and Microsoft clearly had the momentum entering 2022, which carried over to competitive console sales.

Over 3 billion people play video games, so it’s a battle of who can reach the first billion. I would bet on Microsoft in a heartbeat. Assuming the deal closes, Activision Blizzard will give Microsoft a massive base of 361 million players and will allow Microsoft to leapfrog PlayStation’s base of over 100 million accounts.  

To complete the acquisition, Microsoft will likely have to make an agreement with the Federal Trade Commission that it won’t pull Activision’s top-selling game, Call of Duty, from the PlayStation to make it exclusive to Xbox. But Sony is clearly worried.

Within two weeks of Microsoft’s Activision announcement, Sony announced it was acquiring Bungie, which develops the former Activision franchise Destiny. Activision sold the publishing rights to Destiny back to Bungie in 2018 after the game failed to meet sales expectations. From that perspective, Sony’s move for Bungie is not much of a counterpunch to Microsoft.

The game is being played on Microsoft’s terms

For the past two decades, PlayStation has dominated the console gaming market, but Sony’s recent strategy shows a company playing defense as Microsoft gains market share in console sales and subscriptions to Xbox Game Pass.

Sony has recently made greater efforts to publish its PlayStation games on other platforms, such as PCs, to expand its audience, but the jury is still out on whether this is enough to keep up with Microsoft. 

The problem for Sony is that the video game industry is shifting away from its core competency of making consumer electronics to Microsoft’s strength, which is subscription services.

The biggest problem is that Sony doesn’t have $68 billion to buy a game company. Microsoft produces enough cash from operations to buy almost any game studio in the world to add exclusive titles to Xbox Game Pass. Although Microsoft is still behind Sony in console sales, it might have already won the war.

John Ballard has positions in Netflix. The Motley Fool has positions in and recommends Activision Blizzard, Microsoft, and Netflix. The Motley Fool has a disclosure policy.