Sony PlayStation may be looking at a third-place finish behind Microsoft for the first time, based on combined Activision and Xbox revenues
Microsoft and Sony have long been fierce competitors in the high-end console gaming market, with Sony typically leading by almost every metric. Despite Xbox’s low market share, Microsoft has seen tremendous success by expanding to PC and doubling down on services. With the acquisition of Activision-Blizzard (the makers of Call of Duty), Microsoft may be on track to surpass Sony’s gaming revenues for the first time in history. Tencent is still the undisputed leader, thanks to investments in companies such as Epic Games, dominance in China, mobile titles, and ownership of League of Legends’ Riot.
Microsoft has long touted its goal of becoming the gaming industry’s top dog, while also stating that it is looking to players such as Apple and Tencent rather than PlayStation and Nintendo to achieve that goal. Tencent is, indeed, the industry’s dominant player. The Chinese tech behemoth has made significant investments in companies such as Epic Games with Fortnite, and it holds a dominant position in both the Western and Eastern markets for service PC and mobile games. Despite the fact that it does not produce games or gaming hardware, Apple has long been a step ahead of Microsoft due to the massive taxes it imposes on developers in its iOS app stores. However, the landscape is rapidly changing.
Newzoo recently released a detailed report on the games industry for H1 2023 (via @superhys), revealing a familiar top-ten lineup. According to Newzoo, the games industry will generate $184 billion in revenue for the entire fiscal year 2023, and this figure is expected to rise to $205.7 billion by 2026. The majority of gaming revenue remains in mobile, though PC and console revenue increased, while browser-based games continue to decline. Mobile gaming also saw a slight decrease, but it still accounts for 49% of the total pie, with console and PC accounting for 29% and 21%, respectively.
Things get more interesting when you look at the breakdown by company. Tencent is far ahead of the competition, with a commanding lead in service games across all platforms. Tencent’s League of Legends esports ‘Worlds’ event for 2023 became the most-watched esports event in history this week, and the company owns 40% of Epic Games, the creators of Fortnite and the Unreal Engine. In the West, the company competes directly with Activision-Blizzard through Riot Games, whose titles undoubtedly drew inspiration from Blizzard staples.
Speaking of which, Activision–Blizzard is now a wholly owned subsidiary of Microsoft, following a lengthy acquisition process that lasted 18 months. The transaction was only completed in October, so Activision’s revenue will not be included in Microsoft’s H1 2023 revenue. However, Newzoo took the liberty of imagining what the chart might look like if those revenues were combined, as shown below.
In a world where Microsoft and Activision’s revenues are combined, Microsoft will overtake Sony PlayStation as the second-largest gaming company for the first time in gaming history. It exemplifies Microsoft’s desire to emulate Tencent in this space, producing service games that are available across all platforms, as opposed to the more traditional closed console ecosystem approach that has proven successful for PlayStation and Nintendo. Microsoft has also told investors that the combined revenue streams will result in a near 50% increase in gaming revenue for the next quarter.
Other events could throw the balance even more off. The European Union has designated Apple as a “gatekeeper” tech firm, which means they will be forced to open up their platform to third-party app stores and app side-loading beginning in 2024. Microsoft has been extremely open about its desire to create an Xbox mobile game store, and it is devoting significant resources to that end. If Microsoft can deprive Apple of revenue from Call of Duty Mobile, Minecraft, and other major third-party games by offering a better revenue split, Microsoft’s goal of creating the “Steam of mobile” will be furthered. Personally, I believe it is unlikely. Samsung already has something similar with its own Galaxy Store and has barely made a dent in Android, but perhaps Microsoft has a secret weapon that we haven’t discovered yet.
According to Newzoo, the top ten companies generate 50% of all gaming revenue, but despite this concentration, the diversity of business models is quite striking. PlayStation and Nintendo are entirely focused on their own hardware ecosystems, with PC and mobile being treated as an afterthought, while Tencent, the market leader, does not make any hardware at all. Microsoft is perhaps the most diversified now, with a strong offering in mobile games through Activision, a strong presence in Western console markets, and increased visibility on PC through services such as Xbox Game Pass. Nonetheless, Microsoft faces numerous challenges.
Xbox Series X and Xbox Series S hardware sales continue to fall year over year, trailing even the Xbox One, despite the console’s ill-fated launch. Microsoft’s strategy of putting its games on PC is undoubtedly affecting the desirability of its own console hardware, and I would argue that a lack of innovation and investment in console features has contributed to a decrease in excitement and interest in the platform.
Sony has forged ahead with innovative accessories such as PSVR, its PlayStation Portal streaming handheld, and pioneering haptics in its controllers. In comparison, the Xbox Series X|S loses features from its predecessors, including Kinect, SPDIF audio optical, and HDMI pass-through. According to leaked documents, Microsoft has no plans to build its own Xbox handheld, despite the fact that devices like the Steam Deck and ASUS ROG Ally are in high demand.
Microsoft does have a strong slate of upcoming Xbox games that should help move the needle, but despite a massive marketing campaign, Starfield appears to have failed to help the Xbox Series X|S’s fortunes.
In any case, Xbox’s future is unquestionably secure. Its undeserved “underdog” status is quickly fading, thanks to the breadth of its combined portfolio with Activision-Blizzard and ZeniMax, as well as the diversity of its offerings across all platforms. As a supporter of the traditional Xbox console hardware ecosystem, I hope Microsoft has more tricks up its sleeve to turn around its fortunes there as well.