Analysis: Sony faces deep-pocketed rivals in war over future of gaming

SQUARE ENIX HOLDINGS

19/01/2022 08:05

By Sam Nussey
    TOKYO, Jan 19 (Reuters) - Sony Group  6758.T , perched atop
the gaming sector, is facing a fresh challenge from cash-rich
rivals betting on a next-generation online video game boom as
the Japanese conglomerate eyes expansion on multiple fronts,
including electric cars. 
    Microsoft Corp  MSFT.O , a laggard in the generational
console battle with Sony, took a major step to position itself
for the "metaverse" - a proposed immersive experience where
people game, shop and socialise online - with a $69 billion deal
https://www.reuters.com/technology/microsoft-buy-activision-blizzard-deal-687-billion-2022-01-18
 for "Call of Duty" developer Activision Blizzard  ATVI.O .  
    Sony's shares slumped 13% https://www.reuters.com/technology/sony-shares-untraded-with-glut-sell-orders-microsoft-gaming-push-2022-01-19
 on Wednesday amid concern Activision titles would be pulled
from PlayStation systems. 
    "They're basically trying to build a monster," said Serkan
Toto, founder of the Kantan Games consultancy in Tokyo. "I don't
think Microsoft is spending $70 billion to become a software
provider for Sony platforms."
    The full frontal approach contrasts with Sony, which has
made incremental deals and gained praise for building a network
of in-house gaming studios that have produced hits such as
"Spider-Man" and "God of War." Analysts say it - and other
giants - may now feel pressure to make more deals in response.
    Microsoft's deal for Activision is made possible by its vast
array of other businesses, including software and cloud
services, with its market capitalization more than 14 times that
of the Japanese conglomerate. 
    Many observers see Activision as a tarnished business after
allegations of sexual harassment and misconduct by managers and
with its major franchises losing momentum, analysts say. 
    The developer is "basically a semi distressed asset," said
Mio Kato, an analyst at LightStream Research writing on the
Smartkarma platform. "This backward-looking nature to
Microsoft's strategy is what makes us sceptical about their
ability to compete with PlayStation." 
    
    PRESSURE TO CONFORM
    The deal will likely aid Microsoft's aggressive expansion of
its Game Pass subscription service, which raises concerns Sony
will be forced to follow suit. Offering games for a flat fee can
eat into sales and erode margins. 
    "Most analysts have been napping during these developments,
cheering Sony's stronger movies and music business to justify a
higher rating," Amir Anvarzadeh, a market strategist at
Asymmetric Advisors, wrote in a note.
    Tech giants including Apple  AAPL.O  and Amazon  AMZN.O 
have also advanced into gaming in recent years, but struggled to
deliver hits. 
    Sony, by contrast, has a pipeline of hotly awaited titles
including "Gran Turismo 7" and "Horizon Forbidden West".
Microsoft has leaned heavily on the "Halo" series, whose latest
instalment was delayed before release in December.
    Advances to cloud technology are loosening ties to consoles
amid expectation consumers will spend more time playing and
shopping in virtual reality and attracting investment from firms
like Facebook parent Meta  FB.O . 
    The change has been compared to the epochal shift to
electric and autonomous vehicles.  
    Sony, which plans to launch a next generation virtual
reality headset https://www.reuters.com/technology/sony-teases-details-next-gen-vr-headset-2022-01-05,
 is also considering entering the electric car business https://www.reuters.com/technology/sony-says-establish-new-electric-vehicle-company-2022-01-05
 to take advantage of its edge in areas including entertainment
and chips. 
    On Wednesday shares in gaming firms including Square Enix
 9684.T  and Capcom  9697.T  popped on speculation the
Activision deal could lead to more consolidation. 
    Sony, a Japanese industry champion at a time when many local
firms are losing ground to overseas rivals across a swathe of
sectors, is seen as one potential buyer. 
    "Sony may come under pressure to do more M&A," Jefferies
analyst Atul Goyal wrote in a note, adding that "if there are no
regulatory bottlenecks, then Microsoft may go after another
target in the not too distant future." 

 (Reporting by Sam Nussey. Editing by Gerry Doyle)
 ((sam.nussey@tr.com;))