Why Microsoft bought Bethesda for $7.5 billion

Views: 428

Microsoft’s priciest video game acquisition, a $7.5 billion purchase of Bethesda Softworks parent company ZeniMax Media, shocked the industry on Monday. The deal puts Bethesda, one of the industry’s biggest publishers and owners of some of the most successful gaming series, under the Xbox brand. It also raises a simple but powerful question: how does buying Bethesda fit into Microsoft’s overall Xbox strategy?

The immediate and inevitable reaction from consumers focused, naturally, on competition, and whether future Bethesda titles will become Xbox exclusives. It’s a sensible concern — why, after all, would any company in an industry as cutthroat as gaming purchase a major entertainment brand if not to deprive its primary rival the ability to distribute coveted intellectual property on competing hardware? But that’s a question for the old Microsoft, the one that tried competing with Sony in an exclusivity game that ultimately kept it perpetually lagging behind throughout the Xbox One generation. (Xbox chief Phil Spencer tells Bloomberg the immediate plan is to evaluate multiplatform releases on a “case-by-case basis.”)

Every major publishing decision Microsoft has taken in the last three years, since the launch of its Xbox Game Pass subscription service, indicates it no longer sees much value in exclusivity — or even in selling full-price games, for that matter. One of the biggest franchises in gaming, Halo, isn’t even exclusive to the Xbox platform anymore. Thanks to xCloud, you can play Halo on an Android phone if you like. The next major release in the series, Halo: Infinite, will be free on Game Pass for console and PC when it launches next year.

Microsoft is no longer playing the same game as Sony, and the Bethesda purchase may well make that point clearer than ever before. Sony has followed a tried-and-true strategy of acquiring promising developers and nurturing them over many years to produce large sequel-friendly franchises like Spider-Man and Horizon Zero Dawn. It also maintains strong relationships with independent Japanese partners, like From Software and Square Enix, to help maintain its edge so that the new Final Fantasy game or a Demon’s Souls remake comes to PlayStation first.

Instead, the question we should be asking about Microsoft is what Bethesda brings to Xbox Game Pass, and how owning that library helps Microsoft achieve its vision for its subscription service going forward. What’s immediately clear is the Bethesda acquisition makes Game Pass an even better deal, which is, without question, Microsoft’s most pivotal priority headed into the next console generation this November.

Image: Microsoft

Spencer made sure to make mention of Game Pass in the company’s announcement post this morning. “Just as they took the bold first steps to bring The Elder Scrolls franchise to the original Xbox, Bethesda were early supporters of Xbox Game Pass, bringing their games to new audiences across devices and have been actively investing in new gaming technology like cloud streaming of games,” Spencer wrote. “We will be adding Bethesda’s iconic franchises to Xbox Game Pass for console and PC.”

Bethesda Game Studios director Todd Howard echoed similar sentiments, saying that it’s Microsoft’s vision that convinced the company to agree to join the Xbox platform. “Why does it matter where the screen is or what the controller is? There are many people without the same access, and we can bring it to them,” he wrote in a post on Bethesda Game Studios’ website. “Like our original partnership, this one is about more than one system or one screen. We share a deep belief in the fundamental power of games, in their ability to connect, empower, and bring joy. And a belief we should bring that to everyone — regardless of who you are, where you live, or what you play on. Regardless of the screen size, the controller, or your ability to even use one.”

Although it’s a common refrain to assert that Microsoft lacks console exclusives, the company now has quite an impressive first-party suite. It owns Minecraft, the best-selling game of all time, which is available on pretty much every conceivable platform. It owns the rights to series like Halo, Gears of War, and Forza. Since 2018, it’s also gone on a buying spree, picking up beloved RPG maker Obsidian, indie darling Double Fine, and the versatile British studio Ninja Theory. Now, with Bethesda, Microsoft also owns the makers of Doom and Wolfenstein, Dishonored, and Deathloop (a timed PS5 exclusive, coincidentally), and Fallout and The Elder Scrolls.

Microsoft may not necessarily care about exclusivity anymore, but it still needs studios. First-party developers are the lifeblood of game publishers because they allow them to control the cadence of major releases and better manage budgets and cross-franchise resources like game engines and creative talent. Most important to Microsoft right now, however, is having the final say on distribution. By owning a studio, Microsoft gets to decide where and for how much the game is sold, including giving it away for free as part of a subscription service.

Keeping the next Fallout or Elder Scrolls game off the PS5 is not a savvy business move. Microsoft does not care where you play their games, for the most part. Rather, ensuring that a major new release is available for free on Game Pass the day it comes out, with no extra cost to Microsoft for having to secure a pricey revenue-sharing deal or pony up for limited time access, is the smarter play — one that owning the studio allows it to do. This is, in fact, Microsoft’s core strategy for the future of Xbox. Look at the release of Obsidian’s The Outer Worlds as an example. The game came out on Xbox One, PS4, and PC, and it’s available for free on Windows and Xbox if you’re a Game Pass subscriber. Everyone wins.

As of today’s announcement, Microsoft says it has 15 million Game Pass subscribers. At an average of $10 per user, accounting for some $5 and $1 limited time signups and subscribers of the $15 premium Ultimate subscription, that’s more than $1 billion in annual subscription revenue. Add to that any revenue Microsoft plans to make off third-party games on Xbox consoles and through the Microsoft Store on PC, any console revenue it might earn from the Series X / Series S sales, and full game sales and microtransactions for its first-party titles, and you’ve got a healthy Xbox business.

But far and away the most important part of that equation — the part that can continue to grow enormously — is Game Pass. Microsoft could double its Game Pass revenues with 20 million subscribers. At 50 million, Game Pass is generating $6 billion a year, more than three times what Fortnite made last year and close to the entire annual revenue of Activision Blizzard, the most valuable third-party game publisher in the industry. The Xbox business could make only a fraction of Sony’s PlayStation 5 hardware sales and still be generating mind-blowing amounts of cash, purely off subscription revenue.

That’s not to say Microsoft doesn’t care how many Xbox units it sells or whether its first-party games make back their budgets. It’s very likely Microsoft is approaching this uncertain next-gen future with contingencies in place, like using its vast pool of resources — the company has a market cap of $1.5 trillion — to keep Game Pass afloat until it starts making a healthy profit, while taking every measure to ensure it sells as many units of hardware and Halo it can.

That’s why there’s a cheaper Xbox Series S, after all. The more Xbox devices in living rooms, the more potential Game Pass subscribers Microsoft can sign up. It’s likely no coincidence this news was announced on the eve of next-gen Xbox preorders going live; a huge acquisition deal is an encouraging sign for the company’s commitment to Xbox and Game Pass that may translate into more hardware preorders.

But what’s important is that Microsoft isn’t all-in on just one path. Putting a new Bethesda game on Game Pass doesn’t mean a consumer can’t buy a disc copy at Best Buy or presumably purchase it on the PlayStation Store well into the future. Microsoft has its bases covered, and it’s investing in xCloud in the event new business models crop up in the future.

If all goes according to Microsoft’s plan, consumers won’t be talking so much about which company has the better exclusive lineup or which brand “won” the next-gen race. Instead, chances are you may own both consoles and maybe even a PC. Microsoft may not really care — so long as you keep giving it $10 a month for Game Pass.

Tags: , ,
Microsoft’s new digital Xbox store now available to all Xbox One owners
Amazon will launch a new location-tracking mesh network system later this year

Latest News



Artificial Intelligence


You May Also Like