Microsoft’s legal counsel has responded to Sony’s claims about the Activision-Blizzard deal, and has over-dramatized a common business practice among platform holders.
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Microsoft representation had interesting things to say about Sony in its response letter to Brazil’s CADE agency, which functions similar to the FTC in the United States. CADE is currently asking games companies about Microsoft’s huge Activision-Blizzard deal and how it could affect the industry. Sony counsel implied that Call of Duty being kept off of PlayStation could cause anti-competitive harm, and said that subscription services can lower a game’s overall quality. It’s important to remember that attorneys and lawyers representing Microsoft and Sony have made these comments.
Now Microsoft’s counsel has issued a document arguing against Sony’s claims namely exclusivity. One of the more interesting sections has dramatized how exclusivity works in regards to subscription services. Legal reps allege that Sony pays video game developers and publishers for “blocking rights” to “prevent” a game from coming to Game Pass. This nomenclature can be simplified in a term that all gamers will recognize: Exclusivity.
“Exclusivity strategies have been at the heart of Sony’s strategy to strengthen the company’s presence in the gaming industry and that Sony is a leader in the distribution of digital. Sony’s concern with possible exclusivity of Activision content is incoherent to say the least.
“It just reveals, once again, the fear regarding a model of innovative business that delivers hihg-quality content at low costs to players, threatening a leadership that was forged from a device-centric strategy and focused on exclusivity over the years.
“Microsoft’s ability to continue expanding Game Pass has been hampered by Sony’s desire to inhibit such growth. Sony pays for “blocking rights” to prevent developers from adding content to Game Pass and other competing subscription services.”
Sony does indeed pay developers for content exclusivity and it pays off big time for the company. This includes games sold on the PlayStation Store (take Final Fantasy 7 Remake, for example, which is still not out on Xbox) as well as licensed content to be hosted on PlayStation Plus. Sony has been securing these kinds of deals for decades in order to get ahead of competition, however game sales pale in comparison to live services driven by specific games, which is a business practice that leans more into subscriptions than anything else.
Sony, for example, makes more money from add-on content (microtransactions, expansions, etc) than it does from game sales. Considering Sony doesn’t really have any live service games on the market yet (that will change, it wants 12 live games by 2025, and it now owns Bungie and Destiny as well), it’s fair to say PlayStation is mostly built on third-party live service games that are widely available on all platforms and not exclusive titles. Sony also makes more from live games than it does from subscriptions or game sales.
Looking at Sony’s Network Services division, which includes PS Plus (and the former PS Now), Sony made roughly $823 million from services during the period.
All-told, Sony made $3.3 billion from digital games, network services like PS Plus, and microtransactions in Q1’22. Microsoft, on the other hand, made $2.77 billion from content and services.
Microsoft very likely does the same thing to supplement Game Pass, which is described as the leader in game subscription services. Microsoft makes closed-door deals to bring a game to Xbox Game Pass for a specific amount of time, and exclusivity is probably a big part of those deals. Just look at all the games offered on Game Pass that aren’t included on the new PlayStation Plus games library.
These deals seem long-lasting, too, as games only slowly rotate out of Game Pass. In practice, this is similar to how Netflix and other service-holders secure non-owned content over a set period in order to boost value.
This is not to mention the first-party Microsoft games that are all kept off of PlayStation, and for good reason. Hosting and selling your wholly-owned games on a service or platform you operate means you keep 100% of all revenues (and pay 100% of all costs, too).
What’s also interesting is the counsel’s comments about Sony’s walled garden approach to exclusivity, which is presumably aimed at the PlayStation 4 era. Microsoft too secured exclusivity deals during this generation (and is still doing so for the Xbox Series X/S gen), but the main difference is that Microsoft diverged away from a singular platform and integrated Xbox onto PC using the Windows operating system following the Xbox One’s sales decline. It’s likely that Microsoft had always planned to unify consoles and PC with a lease-to-play service infrastructure similar to Game Pass given the company makes most of its revenue from cloud services that operate similarly–consumers and enterprise operators pay over time for products instead of all at once.
Microsoft innovated in the subscription space because that was one of the only ways to “save” the Xbox brand. Game Pass has transformed the Xbox business.
Xbox earnings went from $9.26 billion during FY17 when Game Pass launched to $16.22 billion in FY22. Content and services revenue went from $9 billion during Game Pass’ launch year to $12.5 billion in the present day.
A big reason for this jump in revenues is subscriber adoption driven by value. Value is driven by content, and Microsoft secures this content with lucrative offers to developers. These deals are NDA’d and aren’t made public, however it is very likely that Microsoft pays developers to keep their games off of competing services, too.
As someone who has paid attention to the games industry for many years, I find this kind of language to be interesting if not dramatic. Microsoft counsel is defending against Sony’s allegations, however Sony is not doing something necessarily unique. It’s just that Microsoft has moved on to the point where they do not have to depend on console generations in order to make billions from gaming, and Sony is slowly catching up by releasing its games on PC and trying to create a cross-platform webwork of games and services.
