If Satya Nadella, CEO of Microsoft, has his way, packages under the Christmas tree and exchanged during Chanukah will be full of boxes containing Xbox consoles and games. To increase gaming revenues, he's made some organizational moves assigning Phil Spencer as head of Xbox and Xbox Live, reporting to Windows chief Terry Myerson. But internal changes will not be sufficient in this huge, highly competitive and fast-paced market, especially given Microsoft's slow growth relative to competitors, a laggard performance largely driven by the impact of mobile gaming.
Market Size is Large and Growing
The rewards of gaining share are significant. The global video games market will increase by 9.4% this year to $83.6 billion, according to the 2015 Global Games Market Report produced by research firm Newzoo. Gaming market revenues will increase to $91.5 billion by the end of 2015 and are projected to reach $107 billion in 2017. Gartner is even more aggressive in its projections, estimating that global video game sales will reach $111.1 billion by 2015. Wrestling away even an incremental slice is significant money.
Scale and focus are critical in this unique market. According to a report in VentureBeat, the top twenty-five publicly-traded companies operating in games collectively made $54.1 billion in revenues last year, 65 percent of the global video game market.
Microsoft's Gaming Vulnerability
Notably, Microsoft is third in this ranking, behind Tencent and Sony. An argument could be made that a third place show in such a large and growing market is positive. And that argument would be accurate except that consumer preference for mobile gaming is cracking Microsoft Studios' veneer and threatening its market position.
While gaming revenues can only be estimated given company reporting structures, Microsoft's low single digit 2013-2014 year over year growth is vastly outpaced by the double-digit growth of Electronic Arts (EA Games), which stands a close fourth in revenue ranking. Apple and Google, Microsoft's perennial nemeses, experienced year over year growth of 35% and 89% respectively. That level of comparative performance has to rankle Mr. Nadella, Mr. Myerson, and Mr. Spencer.
Apple's and Google's explosive growth is driven by mobile gaming, pointing to a trend that Microsoft has yet to strategically embrace. Mobile game revenues will eclipse console game revenues for the first time in 2015, according to Peter Warman, Newzoo’s chief executive. Reporting in Fortune, Warman estimates that mobile games, primary offerings of Apple and Google, will generate $30.3 billion worldwide while console games, primary offerings of Microsoft, will only earn $26.4 billion.
Of course, Xbox Live is more than a simple console, and Microsoft's Windows 10 strategy calls for a common operating platform, moving the offering from console to personal computer and, in time, to mobile devices. Yet, the current growth of mobile games provides fluid revenue streams for both Apple and Google, given their up to 30% commission on all games sold in their app stores. Warman estimated, “Apple and Google will earn close to $4 billion and $3 billion respectively in games revenues in calendar year 2014.” Newzoo forecasts that global mobile gaming revenues will top $40.9 billion by 2017.
Given the ubiquitous nature of smart phones, and accompanying game apps, console-based business models require tweaking. There are over a hundred million Xbox and Xbox One, Wii, and PlayStation consoles in place, but that number pales in comparison to the billions of smart phones and tablets. Indeed, with the demise of the use of the landline, smart phones are becoming a necessity, whereas consoles are a luxury - dedicated gaming devices. And the former can more easily introduce new consumers to games, an annuity for Apple and Google.
Why is this Important?
Upon his appointment as CEO, Mr. Nadella announced a strategic intent to "thrive and grow in a mobile-first, cloud-first world." In this broad strategy, gaming has become a key component and now accounts for approximately 10% of the corporation's revenue. This year Mr. Spencer and his team have created a list of exclusive games that are being touted in the marketplace as the greatest in Xbox's history, presenting an opportunity to grow.
However, without a strong strategy and quick execution to address the mobile gaming gap, Microsoft risks a continued loss of market share to Apple, Google, and other competitors that emphasize mobile gaming. Given this marketplace dynamic, and under a "mobile-first" enterprise strategy, Microsoft's gaming team would be smart to consider numerous potential scenarios as mobile gaming preferences and technology advance. Applying their understanding of their own mobile capabilities and those of competitors against a variety of marketplace scenarios will provide valuable insight into today's dynamics and those of the future. Only then will Microsoft be assured of more robust growth in light of continued competitor activity. What a wonderful holiday present to give to the shareholders.