Microsoft Corporation is losing against Sony Corp in the battle for the living room, and some of the people in the firm’s games division are getting frustrated. Phil Spencer, the head of the Xbox One at the firm, complained about Sony buying its market share earlier this week. He says that the reason Sony is getting all of the good third party deals is because it’s buying them, plain and simple.
We already knew that. Activision Blizzard and Electronic Arts don’t hand out DLC to console buyers, so why should they give them to console sellers for free?
What was interesting about Spencer’s comments was what he added:”Some people think it’s somehow less expensive to sign third-party exclusives if you have a bigger market-share. I can tell you, it has nothing to do with market share.” Mr. Spencer made the comments in an interview with Gamespot.
Market share gets third part exclusives
At LearnBonds we’re part of the group that thinks that third party exclusives are cheaper for the bigger player in the market, so Mr. Spencer’s comment was interesting. It’s clear that Xbox One VS PS4 market share must have something to do with the price that console makers pay for exclusives. That simply makes economic sense.
Spencer did a little bit of a backflip in his run down on how the Xbox One VS PS4 market works. He quickly added “When you go in to do a deal, with a third party, that third party has its own view of the global market and the value of it. And they should, they should think about their assets and how valuable they are, just like anyone would when they are selling their goods.”
It seems that when Bobby Kotick of Activision Blizzard was trying to decide whether the deal Sony offered is worth the hit he might have a look at sales figures. No matter what his opinion of his “assets and how valuable they are” market share has to figure into the picture. He didn’t offer any exclusives to the Ouya.
Either Mr. Kotick is deeply bad at his job, and judging by the 160 percent return in Activision-Blizzard share over the last five years he’s not, or Mr. Spencer is trying to obfuscate the reality.
We don’t have an insight into how those deals work. Mr. Spencer does. That doesn’t mean he’s telling the whole truth though.
Mr. Spencer did a little doubling back on his response to “Sony’s gobbling up deals,” later on in the interview explaining that he had his “passion go up.” That may explain the unclear way he put forward that idea.
The changing face of Xbox One VS PS4
Context is often lost in the Xbox One VS PS4 fight, and it appears that Mr. Spencer, doubtless aware of it himself, is hoping that his comments to Gamespot won’t be put alongside the reality of the market.
The piece was all about how Microsoft is focusing on first-party titles. The subtext is that greedy Sony is using all of its money in order to dominate the third party world. That’s not the kind of story that Microsoft is going to be able to sell after years of buying up third party content for the Xbox 360.
The Xbox One VS PS4 battle, though many thought it could be different, is an exact reflection of the PS3 VS Xbox 360 battle. Back then the Xbox team had both the deep pockets and the market share to pay for third party content.
The Xbox One VS PS4 battle has put Sony in the driver’s seat, and it’s using its place to do everything Microsoft wishes it could do.
We already took a look at the way that the Xbox segment performed in the second quarter of the year. It looks like the business doesn’t make any money. If it does, it makes much less than other divisions at Microsoft, bar Nokia hardware of course, and Satya Nadella’s team in the big office probably isn’t interested in pouring more money into hardware.
Counting the cost of Xbox One VS PS4 loss
If that’s true, then the Xbox One team simply doesn’t have the cash to pay for third party exclusives. That’s true even if “it has nothing to do with market share.” The focus on first party titles, something that Sony is also doing, is blurring that.
Mr. Spencer doesn’t agree that the focus on first party should make his job harder. He said “It doesn’t make it harder or easier, it’s just a decision.” The decision may have been made for him by higher-ups at Microsoft who were worried about the high cost of getting market share back from Sony.
Making sense of third party Xbox One VS PS4
The Xbox One VS PS4 battle is complex, and it’s not easy for someone outside of the business to understand. Microsoft and Sony both do their best to hide the real costs and earnings of their gaming segments from investors and the public.
Because the firms refuse to explain the real numbers in the Xbox One VS PS4 fight, something that likely helps protect from competition, we have to make decent guesses about how they work on the inside.
When looking at the amount of third-party exclusives that Sony has managed to wrangle since the start of the year, a decent guess would be that the firm is paying for them.
We don’t know how Bobby Kotick or Andrew Wilson value their property, but a decent guess is that they’ll charge less to a console that has higher market share. The numbers make it clear which side of the Xbox One VS PS4 battle that would fall on.
There’s plenty of weird anomalies in the games market, and in every duopolistic structure. That means there may be stuff going on in the background that makes that statement wrong. It doesn’t stop it from being a good guess about the realities of the market, however.
Mr. Spencer, despite his “just a decision” focus on first party, isn’t likely to reveal how the third party market works any time soon. That means a good guess is going to have to do.
For the time being we’re going to remain some of the people that think market share plays very much into third party publisher decisions, and we’re going to guess that’s one of the reasons that Nintendo decided to abandon the Wii U so early in its life cycle.