Microsoft Levels Up with Bethesda Acquisition

Company adds top-tier titles to its Xbox Game Pass subscription

This week, in a landmark $7.5 billion deal, Microsoft announced plans to acquire ZeniMax Media, the parent company of game publisher Bethesda. Bethesda is one of the world’s largest privately held game developers, and its studios have produced several critically acclaimed franchises including The Elder Scrolls, Fallout and Doom. The company is also behind Starfield, which is scheduled to debut later in 2020.

The proposed deal is the biggest gaming acquisition to date for Microsoft. But the company is no stranger to splashing out on well-known titles; it spent $2.5 billion to buy the maker of Minecraft in 2014. Its latest acquisition will include not only Bethesda Game Studios, but further studios including id Software, ZeniMax Online Studios, Arkane Studios, MachineGames, Tango Gameworks, Alpha Dog Games and Roundhouse Studios. This takes the number of in-house studios aligned to Microsoft’s Xbox gaming division to 23, up from 15.

Bethesda itself is a huge third-party publisher, with its games available on Microsoft, Sony and Nintendo consoles, as well as PCs. Despite fears that the move could result in blockbuster titles becoming exclusive to Xbox, we believe this is unlikely; in the past, Microsoft has allowed wholly owned franchises like Minecraft to appear on other consoles, and the company doesn’t appear interested in following a similar route to Sony, which often defends its exclusive content.

The big question, then, is why Microsoft has decided to spend a vast sum on a games studio if it’s not planning on using this content to boost sales of its hardware ― namely, the Xbox Series X and Series S, which launch in November 2020.

The deal comes at a time when interest in gaming has surged, which may be partially thanks to ongoing lockdown restrictions. As people have increasingly spent time at home in need of more entertainment, gaming companies have reported rising revenues and profits, with hits like Nintendo’s Animal Crossing proving breakout successes during 2020. As a result, the gaming industry is forecast to have a record year, with revenues expected to touch $160 billion.

For some time, Microsoft has been banking on its game subscription service Game Pass to draw in users and lift revenue. So far, this has amassed more than 15 million subscribers, and with attractive content it will continue to gain more. Microsoft has said it plans to add Bethesda’s existing franchises to the Game Pass library, and that future Bethesda games will launch on Game Pass at the same time as on Xbox or PCs.

As a result, the addition of new content could bring Game Pass to higher subscription numbers than ever before, which is of huge value to Microsoft. Although selling its new Xbox models will be important, consoles are access points for games, and controlling the latest and greatest in content gives Microsoft more control ― and probably more gaming revenue – than ever before. We predicted in 2019 that game publishers would become serial acquisition targets as a host of players launched game streaming services (see CCS Insight Predictions for 2020 and Beyond). This prediction has played out at pace.

The impact of the acquisition doesn’t end with traditional console gaming on platforms like Xbox and PlayStation. Bethesda, and the wider ZeniMax family, have been active in virtual reality (VR) gaming, porting popular games such as Skyrim and Fallout 4 for VR enthusiasts and developing new titles like Wolfenstein: Cyberpilot. More interestingly, ZeniMax was at one point embroiled in a legal battle with Oculus over accusations of theft of intellectual property. Facebook was ordered to pay out $500 million following the court battle ― although the sum was eventually halved ― and since then no Bethesda titles have been published on the Oculus store.

All this raises further questions. Will Microsoft use Bethesda’s experience to build VR experiences for its Xbox consoles (something it has avoided so far)? Will it stop supporting PlayStation VR with Bethesda titles, given it has no VR hardware itself? And what about Oculus? Facebook would surely love to promote its new Quest 2 VR headset with some major games and ready-made Bethesda titles may be the easiest way to do this. Right now, there really are more questions than answers.

Gaming is at a defining junction, with new consoles and VR headsets launching within weeks of each other. Microsoft’s huge investment highlights the tremendous value of the gaming industry, where success is increasingly measured by software performance as well as hardware sales. It’s another step toward a more consolidated market, where gaming could end up being concentrated among a handful of power players. Microsoft will be hoping the deal gives it a level up, but its rivals will certainly be fighting hard to keep up the pressure.

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