At E3 2018 Microsoft Looks to the Future

 In Analysis, Console, Forecast/Sales, Microsoft, News

News

For several years, the major console manufacturers have nicely staggered their big press conferences.  Traditionally, Microsoft goes first on the Sunday before the show starts.  So Sunday June 10 the Microsoft press conference launched the start of E3 2018 (assuming one does not consider Saturday’s EA Play event an official part of E3).  Going into E3 2018 Microsoft faced a difficult task.  The company has very few exclusives for 2018 and sales have not been strong for the Xbox One.  So at E3 2018 Microsoft focused on the future.

Microsoft focused on showing trailers for 50 upcoming games for the Xbox One.  Of these, 18 were exclusives.    The big exclusives included a new Halo title, Halo Infinite, Gears of War 5, Forza Horizon 4 and some updates to Sea of Thieves.

Microsoft also announced it had acquired 4 game development studios, Ninja Theory, Playground Games, Undead Labs and Compulsion Games.  They are also opening a new internal studio in Santa Monica, CA called The Initiative.   Finally, Microsoft gaming head Phil Spencer hinted that both a new console system and a game streaming service were in the works.

Impact

Going into E3 2018 Microsoft was clearly in a tough place.  The Xbox One has been crushed by the PlayStation 4 and the Nintendo Switch is becoming a must-have for more consumers.  Microsoft needs to look to the future, and to their credit, that is clearly what they did at E3.

Microsoft did show a ton of upcoming Xbox One games at the show.  The problem was most of them are also coming out for the PlayStation.  Of the major exclusives, most like the new Halo, Gears of War and Forza, are for the dedicated Xbox consumer.  Of those games, only Forza Horizons 4 is coming out in 2018.

The good news is that going forward Microsoft seems committed to the game space.  In recent years, Microsoft has cut back on internal development and it really hurt them in the battle with Sony.  The new acquisitions include Ninja Theory, developers of Hellblade: Senua’s Sacrifice.  This was arguably the most important acquisition as Hellblade launched only for the PlayStation 4 in summer 2017.  It did not come to Xbox One until April of this year.  The acquisition of Compulsion Games gives Microsoft ownership of the upcoming indie game We Happy Few, which had also been slated for publishing on the PlayStation 4.  Playground Games and Undead Labs are already Microsoft focused development studios that respectively work on the Forza and State of Decay franchises.

The fact that Microsoft is beefing up its internal development is a good sign that the company plans to stay in the game business for the long haul.  Under CEO Satya Nadella, Microsoft has been focusing on business-to-business services and shutting down many of its consumer-facing products.  The game business is the major consumer entertainment dedicated business left for Microsoft.

Microsoft launching a new console system will be critical for its continued relevancy in the game industry.  Of course, they could just do a streaming service focused on multiple devices.  Under this strategy, Microsoft would try and distinguish its offering by their exclusive content as Netflix and Hulu do.  However, even with the recent acquisitions, Microsoft is looking fairly light on exclusive content.  If Microsoft goes to a pure streaming service they will be competing not only with Sony and Nintendo, but the likes of Google and Amazon.

The difference between E3 2018 Microsoft and the Microsoft when the Xbox One launched, or even two years ago when they put the nail in the Xbox One coffin with the premature Project Scorpio/Xbox One X announcement, is that on a corporate level Microsoft stock has soared.  In November 2013 the stock was in the mid-$30 range.  By E3 2016, the stock had creeped up to the $50 range.  At E3 2018 Microsoft stock is at $101.

Microsoft clearly has breathing room to look to make a bigger bet on its game business.  With the amount of financial resources Microsoft has at its disposable there is really only upside.  Microsoft investors in general are not well versed in the video game business.  Microsoft stock does not currently trade based on the performance of the Xbox One.  However, if investors start hearing words like Microsoft could become the Netflix of gaming that could resonate in a major way.

The issue with a Netflix of gaming concept,  is that, for the near future, it is likely to require a fairly powerful hardware system to provide a full gaming experience.  Microsoft needs a new console system if it wants to remain competitive.   Based on E3 2018 we now think that is likely to be coming.

We are not writing the epitaph for the Xbox One, but we are close.  When we asked our resident 17-year old Xbox loyalist and expert in all things Xbox what he thought about the E3 presentation his reply was, “I didn’t pay attention.  I am trading in my Xbox One for a Nintendo Switch.”  

The latest DFC Intelligence report with 5-year forecasts for the Microsoft Xbox One is now available.

We also encourage you to check out the new video game industry segmentation that DFC Intelligence did in conjunction with Venture Beat and Atlas Technology Group.  It is available on the Venture Beat website.

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