Xbox’s ‘Starfield’ is Microsoft’s most important bet on cloud gaming

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Wednesday, June 14, 2023

Microsoft is betting on 'Starfield' to power its Game Pass growth

Microsoft (MSFT) is in the midst of a regulatory battle over its $69 billion acquisition of “Call of Duty” maker Activision Blizzard (ATVI). And while the deal could have dramatic implications for the Windows maker and its Xbox division, Microsoft is facing a similarly important test with the September release of its upcoming title “Starfield.”

One of the most anticipated games of 2023, and easily the most important title for Microsoft in years, “Starfield” is an action role-playing game in which you travel across more than 1,000 planets, battle rival space factions, and try to unravel the mystery of a series of strange alien-like objects.

It’s the first new franchise from developer Bethesda in more than 25 years. If you don’t know the company’s name, it’s the firm behind the incredible “The Elder Scrolls” and “Fallout” series of games.

It's also the first major release from the developer since Microsoft purchased its parent company Zenimax for $7.5 billion in 2021. “Starfield” serves as a litmus test for Microsoft’s ability to put out original, or first-party, content that drives subscriptions for its Game Pass gaming service.

“Frankly, ‘Starfield’ means a lot,” explained Neil Barbour, research analyst at S&P Global Market Intelligence.

“It's sitting in the middle of the strategy of not only converting users into Game Pass...but now driving user growth forward to sort of raise the profile of the Xbox platform.”

If it succeeds, as is anticipated, the game will finally prove that Microsoft has what it takes to pump out the kind of massive hits that have eluded it for years. If it fails, though, it would set back Microsoft’s plans to expand its Game Pass audience and shake confidence in the company’s ability to take advantage of Activision Blizzard’s titles in the event the deal comes to fruition.

“Their goal is to get everyone possible into Game Pass Ultimate at $15 a month,” explained IDC analyst Lewis Ward. “I think you can put “Starfield’ in that context of how do we have a AAA release coming out day and date [onto] Game Pass and Game Pass Ultimate so that more people sign up, it’s driving a lot of hours of use.”

‘Starfield’ is part of Microsoft’s push for the cloud

So far, Microsoft’s Zenimax acquisition has had its ups and downs. Games like “Hi-Fi Rush” have been generally well received by critics and players alike. But the company’s recent game “Redfall” has been so poorly reviewed that Xbox CEO Phil Spencer apologized for its quality during an interview with Kinda Funny.

Console makers like Microsoft, Sony (SONY), and Nintendo (NTDOY) traditionally use first-party titles like “Starfield” to drive hardware adoption. But Microsoft is also banking on the game to help push subscriptions of its Game Pass service.

The standard version Game Pass costs $9.99 per month and gets you access to hundreds of games that you can download to your Xbox console or PC. Game Pass Ultimate costs $14.99 per month and includes everything offered via the regular version of Game Pass as well as the ability to play games via the cloud.

Microsoft’s long-term goal is to make the cloud a bigger part of its gaming strategy. Doing so would allow the company to reach gamers in regions where consoles are unavailable or too expensive, by letting them stream games to devices ranging from smartphones to low-powered laptops and smart TVs via Microsoft’s global cloud infrastructure and Azure platform.

“It's part of a longer play of how do they grow their gaming footprint in mobile, where Microsoft doesn't have much of a play,” Ward explained. “Once you go into Azure and the cloud, you start putting these games in a subscription service that's accessible on smartphones and tablets and so forth. They view that as the way to grow their pie over time”.

Microsoft’s Game Pass cloud strategy is also part of regulators’ concerns about the company’s pending acquisition of Activision Blizzard. In a statement objecting to the proposed deal, the UK’s Competition and Markets Authority said that while the tie-up wouldn’t threaten competition in the console gaming market, it would cause a “substantial lessening of competition” in cloud gaming services in the UK.

The Federal Trade Commission also cited Microsoft’s cloud gaming capabilities as one of the reasons it is suing to block the deal.

Proof Microsoft can fight Sony

Sony, unlike Microsoft, has a cavalcade of well-reviewed first-party games that help drive console sales and services subscriptions. As a result, Sony’s PlayStation consoles regularly outsell Microsoft’s Xbox systems.

Microsoft doesn’t report sales numbers of its consoles anymore, but according to a regulatory filing, the company said that it sold less than half as many Xbox systems as Sony’s Playstation 4 during the prior console generation than Sony.

A game like “Starfield,” however, could prove that Microsoft is able to pump out high-quality games like Sony, as well as boost console sales and Game Pass subscriptions.

“I truly believe the team has created something that defines this generation of gaming,” Sarah Bond, Microsoft CVP for creator experience and ecosystem at Xbox, told Yahoo Finance Live.

“Getting the chance to talk to [“Starfield director Todd Howard] about the vastness of the world, the detail in the gameplay, the number of different choices and creative choices you can make, and getting a chance to experience a little bit of [it] myself, I cannot wait for you to get your hands on it,” she added.

If “Starfield” falls short, however, it could be a blow to Microsoft’s gaming efforts in the long term.

“All eyes are on this moment,” Barbour said. “I don't want to put in too stark of terms, but Microsoft kind of needs a hit right now. And if this isn't it, and if the Activision Blizzard deal falls through, it's hard to see into the future where the major growth opportunity is.”

Microsoft still has a few months before “Starfield” hits the market in September. But if the company is ever going to prove it can match Sony’s capabilities and convince consumers that its Game Pass is the way to go, it starts with “Starfield.”

Daniel Howley is the tech editor at Yahoo Finance. Follow him @DanielHowley

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