How Microsoft Could Build The 'Netflix Of Gaming'

Microsoft Corporation MSFT has long been in the gaming business — the company began developing the original Xbox console in 1998.

Microsoft’s share of the console market has slipped in recent years though and the landscape is set to change dramatically, but investors with an eye on gaming should rest assured that it's well-prepared to ride the trend, Morgan Stanley's Keith Weiss said in a recent note.

Microsoft Today: Razors and Razor Blades

Since entering the gaming market, Microsoft has operated primarily on what Weiss calls the “razor/razor blade model” of high margin games being bought for lower margin consoles.

The company created upsell opportunities through accessories and Xbox Live subscriptions, which add features such as multiplayer online gaming, free games and discounts.

Weiss projects Microsoft's gaming business to surpass $10 billion in fiscal 2018, up from approximately $9 billion in fiscal 2017. Within that figure, roughly 70 percent will come from software and subscription services.

It should be noted that Microsoft has disclosed little information on the how its gaming revenue breaks down, but software and services have growth significantly over the past few years as hardware market share declined.

Catalysts For Change

Consoles will continue to play a key role in the gaming, but the future is in the broader ecosystem, according to Weiss.

The company has been working to shift towards recurring revenue streams through Xbox Live subscriptions and newer offerings like Game Pass, which provides access to over 100 games for a monthly fee, and Mixer, a streaming platform designed to compete with Twitch.

Microsoft is working to leverage its Azure cloud network alongside the recently-purchased PlayFab platform to provide an infrastructure for developers to create and scale games globally and across devices.

The hope is that PlayFab will help independent studios especially with engagement, retention and monetization. Indie games have grown significantly in popularity in recent years.

Microsoft Tomorrow: The ‘Netflix Of Gaming’

The biggest opportunity for Microsoft looks to be in subscription-based services through which customers can access a broad range of content across any device for a flat fee. In other words, a Netflix, Inc. NFLX-like platform for games rather than movies and TV shows.

In Weiss’ view, there are three components to this platform:

  • A Monetization Vehicle: Xbox Game Pass. Extending the reach of Game Pass to include mobile devices would significantly increase the size of the market, as customers would not be required to first buy expensive consoles.
  • A Marketing Channel: Mixer. Having its own broadcasting services will help Microsoft to capitalize on the trends in eSports and watching others play games, while providing a space to promote Microsoft products.
  • A Technology Enabler: Azure. If Game Pass can move from a download service to a streaming service, players will be able to access games across devices — further expanding the size of the market. Azure provides Microsoft the technological edge needed over its competitors in making this possible.

Weiss reiterated an Overweight rating and $130 price target on Microsoft stock.

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