By Sarah E. Needleman
Microsoft is facing the biggest test yet of its $75 billion bet on videogames: the release of a new installment of the "Call of Duty" franchise on its Game Pass subscription service, which customers will be able to access for the first time on Friday.
The tech giant's acquisition of Activision Blizzard, the biggest deal in its history, was a wager on the future of how people will access and pay for videogames. Microsoft sought to position itself as a disrupter, believing the streaming revolution would migrate from television and film toward a growing, interactive medium with billions of rabid fans.
"Call of Duty," one of the most successful entertainment properties ever, became part of Microsoft's portfolio in the Activision deal. The company decided to make the latest installment of the shooter series, called "Call of Duty: Black Ops 6," available at launch for streaming or downloading via Game Pass for $19.99 a month, hoping it will drive a surge in sign-ups.
It will also be on sale separately for one-time purchase starting at $69.99.
Microsoft sees streaming -- and the subscription model that supports it -- as a brighter path forward for its videogame business, which trails rivals Sony Group and Nintendo in console sales. So far, convincing gamers to trade downloads and a-la-carte pricing for the cloud and monthly fees has proven difficult for the software maker.
"The big picture vision is a Netflix for videogaming, and I think that's a very viable option," said Joe Tigay, a portfolio manager at Equity Armor Investments, a longtime Microsoft bull. "I don't know it will happen all at once, but Microsoft is in a good position to do that."
Microsoft said its mission is to bring more games to more players across devices, allowing them more flexibility.
The videogame industry is facing structural obstacles similar to those Netflix faced before the streaming era began for movies and TV. Some players are concerned about potential delays that could hurt their chances of winning in competitive games, while many of the most popular games today, such as "Fortnite," are also free to play. Enthusiasts also tend to devote themselves to only a handful of games at any given time because developers continuously update them with new features.
Some analysts are skeptical that Game Pass -- whether people use it for streaming or old-fashioned downloading -- can ever achieve mass appeal. "The videogame business is not suited for an all-you-can-eat model -- at least not at a price that makes sense for publishers," said TD Cowen analyst Doug Creutz. "There's no market for this product."
Microsoft launched Game Pass in 2017, offering people access to a large, rotating library of its own games and third-party titles that could be downloaded to an Xbox for a monthly fee. PC games were added in 2019 and the option to also stream games, including mobile titles, was added in 2020.
Game Pass had 34 million subscribers as of January 2022, a number that Microsoft disclosed in February 2023 and hasn't updated. That is just a fraction of the estimated 3.1 billion people who play videogames -- including mobile titles -- worldwide, according to analytics firm Aldora Intelligence.
Wedbush Securities analyst Michael Pachter says Game Pass subscriber numbers are likely about the same today. He expects the new "Call of Duty" game to boost subscribers by two to three million. A recent price increase "may have triggered churn, but more likely just stalled growth since it is prospective," Pachter said.
With streaming, also called cloud gaming, Microsoft aims to appeal to people looking to play high-end games on a big screen without spending hundreds of dollars on a console. But millions of consumers upgraded their consoles during the pandemic, another reason the transition to streaming and subscriptions has been slow, analysts said.
Another goal is to accommodate those who want to be able to start a game on one device, such as a smart TV at home, then pause and resume playing on another, such as a smartphone while on the go.
Last year, consumers worldwide spent $183.9 billion on game content alone, and this year such spending is expected to increase 2.1%, according to industry tracker Newzoo.
Eric Webster, a 43-year-old technology consultant in Massachusetts, isn't ready to take up cloud gaming because he doesn't think the technology is up to snuff yet. He has also poured thousands of dollars into his gaming PC to get the best gameplay possible. "I don't think it's ready for prime time," he says. "When you look at a game being streamed, you see how over-compressed those images look."
Webster also says he prefers to own games outright. "I don't want another subscription service," he says, adding that he has at least a dozen spanning music, movies and TV. "I might be an old man yelling at the cloud, but I'm hesitant to go all in on streaming."
Thanks to the Activision deal, gaming is now Microsoft's fourth largest business, nearly on par with its Windows division and larger than its LinkedIn and advertising units. In addition to its Xbox consoles, the company owns more than 30 studios that make popular franchises such as "Halo," "Minecraft" and "Fallout."
In releasing a new "Call of Duty" game on a subscription service, Microsoft is deviating from Activision's longtime, lucrative approach of only selling installments from the franchise a la carte. Previously, new editions sold about 25 million copies on average annually, in recent years for around $70 a pop, according to analysts.
Microsoft's goal with videogames is to build "a software annuity and subscription business," Amy Hood, chief financial officer, said on an earnings call in July.
Microsoft last year laid off some 10,000 employees throughout its operations, and this year it let go of about 2,500 people from its videogame unit. The company also has been spending billions of dollars on artificial intelligence, which some investors say could squeeze other business units, including videogames.
"Call of Duty" was central to regulators' concerns over Microsoft's acquisition of Activision, which closed in October 2023, almost two years after it was announced. The prolonged review was partly over concerns that the franchise could give Microsoft an unfair advantage in cloud gaming if it were to decide to withhold the series from rivals. Microsoft pledged not to do so.
Many investors believe it will take time for Microsoft's bet to pay off. "You've got to take risks," said Mike Sander, a principal at Sander Capital Advisors, a Microsoft investor. "This is a good calculated risk."
Write to Sarah E. Needleman at Sarah.Needleman@wsj.com
(END) Dow Jones Newswires
October 24, 2024 21:00 ET (01:00 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
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