Microsoft’s Fight for Activision Is a Bet on the Future of Gaming

Cloud gaming is an emerging technology these days, but experts think that consoles like the Xbox and PlayStation could eventually become less relevant

The acquisition of Activision Blizzard Inc. for $69 billion by Microsoft Corp. has drawn attention to the decades-old paradigm of console-exclusive games played on main rival Sony Group Corp.’s Xbox and PlayStation, but antitrust officials seeking to block the deal may be more concerned about the future of gaming in the cloud.

Cloud gaming is still in its infancy. Most video games, from Activision’s Call of Duty to Elden Ring, developed by FromSoftware Inc., are purchased individually for around $70 each and downloaded to a console or computer. But Microsoft, one of the leading cloud computing service providers, is trying to change that. It has focused its significant gaming effort on establishing a subscription service, Xbox Game Pass, which offers a library of more than 300 titles for about $10 a month for gamers who want to download games to play on the Xbox or PC. A higher tier of the plan, for $15 a month, includes cloud gaming, which allows subscribers to stream select games to any device, even tablets and phones.

While cloud gaming is still in its infancy in terms of the technology and content available today, some analysts and executives believe that consoles may eventually become less relevant. And Microsoft is in pole position with the infrastructure and content to increase its share. By bringing Activision titles like Candy Crush and Call of Duty under its roof, Microsoft is betting it will be able to offer more games to its Game Pass subscribers. The FTC’s concern – and Sony’s as well – is that Microsoft will take an early lead in the cloud by adding Activision’s games, eventually making them all exclusive to its own platforms.

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“We are trying to prevent Microsoft from taking control of a leading independent game studio and using it to harm competition in multiple dynamic and fast-growing gaming markets,” Holly Vedova, director of the FTC’s Bureau of Competition, said in a statement accompanying the statement. from the desk. complaint.

Launched in 2017, Game Pass has grown rapidly and now has over 25 million subscribers, far more than a comparable offering from Sony called PlayStation Plus. Microsoft added cloud gaming to Game Pass in 2020, and more than 20 million gamers have streamed games from the cloud using the service, according to the FTC. Microsoft has said cloud gaming subscription services are essential to achieving its goal of expanding to 3 billion gamers worldwide, and its vision of enabling gamers to play games on Windows, Xbox and smartphones.

The cloud allows gamers to stream and play graphically rich and technically complicated titles such as Assassin’s Creed Origins and Halo Infinite on less sophisticated devices such as smartphones or tablets that otherwise lack the processing power or storage space to support the games. The technology has proven tricky and has yet to take off on a larger scale due to the high-end graphics involved in games and the reliance on ultra-fast data processing required to ensure that every press of a button instantly corresponds to a movement in the screen. game, with zero lag, also known as low latency.

Microsoft has an edge over Sony here, as Microsoft’s cloud division Azure owns more than 200 data centers, which support the lower latency cloud gaming services for its range of titles on Game Pass. Sony does not have its own data centers from which to run its subscription service, PlayStation Plus. Sony launched a revamped version of the service in June, which offers similar subscription levels with access to popular titles like Spider-Man and Returnal, but doesn’t offer new releases in the subscription package, as GamePass does.

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Other tech giants have tried to build a cloud gaming service without much success. Google from Alphabet Inc. had Stadia, the search giant’s attempt to take on the video game console giants with its own platform. But after failing to gain traction with gamers, it will shut down next year. Inc.’s Luna+, which offers streaming access to over 100 third-party games, is also struggling to attract users. Nvidia Corp.’s GeForce NOW cloud gaming offering, which is much more expensive with a top tier of $100 for 6 months, allows gamers to stream titles they already own.

The battle to gain traction in cloud gaming makes the FTC even more concerned that Microsoft could quickly dominate the market. Phil Spencer, head of Microsoft Gaming, has highlighted the role consoles will play in Microsoft’s future. According to Spencer, the company loses $100 to $200 on every Xbox sold. Meanwhile, cloud gaming is predicted to generate $5.1 billion in revenue by 2022, according to industry analyst Omdia, rising to $12.7 billion by 2027. That accounts for about 3% of the $172.7 billion in total gaming earnings expected this year.

FTC Chair Lina Khan has specifically highlighted her concern that Big Tech players could use their power in neighboring markets to dominate emerging markets and is trying to avoid a repeat of the agency’s resignation when Meta Platforms Inc. Instagram and WhatsApp bought.

“Now regulators understand that big tech companies will use their power in one market to conquer downstream markets,” said Vili Lehdonvirta, professor of economic sociology and digital social research at the University of Oxford. “Microsoft doesn’t really dominate the public cloud market, but they have a big advantage over cloud gaming rivals that don’t own their own infrastructure and have to rent from the cloud providers.”

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The FTC is currently in litigation against Meta over its proposed acquisition of Within Unlimited Inc., a virtual reality startup that makes a popular fitness app, Supernatural. In an unusual case, the FTC alleged that Meta was trying to buy the app in an attempt to monopolize the nascent virtual reality industry. Experts see similarities with the Microsoft case.

“Meta says ‘we want to go to the metaverse, we need apps to populate it and Within and Supernatural fit that’,” said Florian Ederer of the Yale School of Management. need for that cloud service, the Activision transaction is a way to fill that.

Sony has been a staunch opponent of Microsoft’s deal, accusing the company of “wanting to tie a lot of consumers to Xbox” and using its other products to “shield cloud gaming at a critical point in its evolution.” Analysts wonder if Sony’s criticism stems from uncertainty that the Japanese tech company is lagging behind Microsoft in diversifying into console gaming. Sony usually releases its best first-party games on PlayStation long before they appear anywhere else.

“If Sony doubles its PlayStation business, it’s potentially very problematic,” said Joost Rietveld, assistant professor of strategic management at the UCL School of management, who spoke to representatives from Microsoft and Sony about the deal.

But Sony’s concerns about Microsoft closing it out by making best-selling games like Call of Duty exclusive to Microsoft have a precedent that the FTC has said it won’t ignore. After Microsoft’s 2021 purchase of ZeniMax Media was approved by the European Commission, the company said it would release three future titles exclusively on its own products, according to the FTC’s complaint.

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