Following this streaming strategy could pay off a lot for Microsoft

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This article was originally published on Fool.com. All figures stated in US dollars unless otherwise stated.

Microsoft Corporation (NASDAQ: MSFT) has his hands in many different companies. Most investors immediately think of the company’s Windows computer software or Azure, the public cloud segment. But gaming has been a part of the business for a long time, starting with personal computers and the Xbox game console first launched in 2001.

Gaming continues to be a fast-growing business today, and Microsoft is arguably more committed to the industry than ever before. Here’s how Microsoft competes for market share in the gaming industry and why it could benefit shareholders in the long run.

Gaming can be more important than you think

Most celebrities are made famous by the movie and music industry, long considered the mainstay of entertainment. But you may not have known that the game industry’s $180 billion revenue in 2021 was more than that of film and music combined.

In addition, the industry is still growing; Mordor Intelligence research estimates that global gaming could grow to $340 billion in value by 2027, driven by increased accessibility through emerging gaming methods such as mobile and cloud-based gaming.

Microsoft’s broad exposure to gaming makes it a logical sector for the company to further invest in. For example, PC gaming is in the wheelhouse of Microsoft as Windows has about 76% market share of the global desktop operating system market. In addition, the company has built its Xbox ecosystem consisting of multiple console products and a subscription service for gaming content, including cloud-based gaming for phones, tablets and laptops.

Borrowing a strategy from the streaming wars

Microsoft’s subscription service, called Game Pass, is where it has harnessed its financial strength in recent years. Content has become king in the ongoing video streaming wars. Netflix, Inc.(NASDAQ: NFLX) was the first streaming platform on the market, but a company like The Walt Disney Company (NYSE:DIS) has quickly built up a rival service as its rich library of intellectual content draws attention. Netflix initially licensed third-party content, but had to spend a lot of money to develop its own content after these third parties discovered the importance of that content and launched their own streaming services.

It can work the same way in video games. Many people don’t buy an Xbox or a Playstation console because they like the hardware itself; you buy everything that gives you access to your favorite game content. That’s probably why game companies fight and spend money to keep major game franchises exclusive to their consoles. You’ll probably never see a game franchise like Mario, the second-highest-grossing game franchise of all time, on any hardware other than a Nintendo system.

Microsoft seems to be following this content strategy – literally. It spent $7.5 billion in 2021 to acquire ZeniMax, the parent company of Bethesda Studios, which owns trendy game franchises such as Elder Scrolls, precipitationand demise. More recently, it has an pending acquisition of Activision Blizzard, Inc.(NASDAQ: ATVI) for $68.7 billion, a deal still under review by regulatory authorities. Closing that deal would give Microsoft ownership of some of the most popular game franchises in history, including: World of Warcraft and Duty.

Recurring income is the long-term goal

Microsoft wants Game Pass to be so good value it would be foolish not subscribe. The service currently costs $14.99 per month, includes instant access to nearly 500 games, and includes free access to cloud gaming and day-one access to virtually every game released by one of the 32 game studios that Microsoft will own as the Activision Blizzard deal closes (23 without the merger).

Microsoft revealed that Game Pass reached 25 million subscribers when it announced its deal with Activision Blizzard. There’s a lot of room for growth — 5G is helping bring the connectivity needed for gaming to more parts of the world, including an estimated 3.24 billion gamers.

Microsoft is spending money to acquire premium gaming content because Game Pass could eventually become a free cash flow geyser for the company. Getting Game Pass to 100 million subscribers paying $14.99 a month would total $18 billion in annual recurring revenue, which would be much more profitable than just selling game consoles. Gaming is a huge company and Microsoft wants to be the king of that hill.

There are plenty of reasons to value Microsoft as a long-term investment, but gaming might just be the next big thing.

This article was originally published on Fool.com. All figures stated in US dollars unless otherwise stated.

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