Software giant Microsoft Corporation (NASDAQ:MSFT) finally unveiled its long-awaited next Xbox this weekend at the annual Electronic Entertainment Expo in Los Angeles. It was, not surprisingly, a technological marvel. Indeed, Microsoft called it the “world’s most powerful console,” and nobody — not even rival Sony Corp (ADR) (NYSE:SNE) — could argue the point.
On the other hand, as impressive as the new Xbox One X is, owners of MSFT stock may want to start asking some more serious questions about the hardware. The first of those question is, what is Microsoft going to do about the sticker shock of the $499 price tag?
Meet Xbox One X
Xbox One X, known as Project Scorpio until officially unveiled this past weekend, is an amazing machine. It boasts an eight-core CPU operating at 2.3 GHz, supported by 12 gigabytes of RAM. That power translates into a 4K display and a blistering 60 frames per second. It tops the PlayStation 4 Pro on all of those key metrics.
The Xbox One X also tops the PS4 Pro in another way, although this isn’t one where it wants to, however. That is, it costs $100 more than the popular recent iteration of the PlayStation console, and unlike the PlayStation 4 Pro the Xbox isn’t able to “do” virtual reality.
The price differential could almost be overlooked by MSFT stock holders were it not for one additional detail that had nothing to do with the hardware specs of the two devices and the corresponding cost to buy each — the games that each machine plays. A total of 42 titles are lined up for the Xbox One X, 22 of which will be Xbox exclusives. Meanwhile, Sony’s library of games playable on the PS4 remains far more compelling.
This overhang is exacerbated by news that surfaced on Tuesday morning — Sony has now sold more than 60 million PlayStation 4’s worldwide, versus none (yet) for the Xbox One X, which won’t hit store shelves until early November. For perspective, that’s roughly twice the sales tally for the Xbox One.
Game developers tend to focus on making games for consoles that are widely owned, but consoles become widely owned because the library of games playable on them is large.
Of course, there’s an increasingly good chance Microsoft knows its expensive and strangely limited new console isn’t going to dethrone Sony’s dominance, or even take market share owned by Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY). The company just may not care.
It’s All About the Subscriptions
There’s a method to the madness of a machine that is (1) priced out of reach for most casual gamers, and (2) doesn’t support virtual reality.
That is, Microsoft appears willing to sacrifice hardware-driven revenue in order to establish a smaller, but potent, base of hardcore gamers who will sign up — or who already have signed up — for its Xbox Live service, and those who will sign up for the Xbox Game Pass subscription service. The former allows you to battle other gamers online, as well as offers discounted downloads, while the latter has been likened to Netflix for video games. For a recurring monthly fee of $9.99, a library of games are playable for a few weeks, and then those titles are replaced by other games.
Game Pass only launched a few days ago. Xbox Live, however, has been around for ages, though, and boasts more than 50 million users paying between $40 and $60 per year for the service (depending on the package). Crunching the numbers, Microsoft’s Xbox Live business generates more than $2 billion in annual revenue. Game Pass would generate $120 million in revenue for every million subscribers it garners.
With cash flow like that, Microsoft can afford to embrace the fact that it’s addressing only a small niche in the gaming market, rather than fight an uphill battle against Sony.
Looking Ahead for MSFT Stock
Just for the record, Microsoft’s video game business has never had a massive impact on the company’s top or bottom line. Gaming revenue of $1.9 billion in the first quarter of this year only accounted for a little more than 8% of the company’s revenue tally of $22.1 billion. Holiday-related spending on video games made the fourth quarter a great one for the company’s video game business, but at $3.6 billion worth of revenue was still only 15% of Microsoft’s revenue mix. That’s commendable, though not game-changing.
Still, there’s a certain solace owners of MSFT stock can take in knowing that the company isn’t trying to do something it’s never going to be able to do, but is instead carving out a piece of the gaming revenue pie that it’s well-equipped to dominate.
Sony may be the market leader, but its margins are paper thin. Ditto for Nintendo.
Microsoft, on the flip side, may actually be able to maintain a smaller but decidedly more reliably profitable video gaming arm. That in itself is a breath of fresh air neither of its key competitors have been able to offer in a long while.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
