The State of Xbox (Premium)

In the wake of yesterday's Xbox Games Showcase and Starfield Direct events, Microsoft separately discussed the future of Xbox. The timing is, of course, critical: Microsoft's $69 billion Activision Blizzard acquisition hangs in the balance with Microsoft needing back-to-back appeals court victories to consummate a victory that can only be described now as a remote possibility at best. So what we're really discussing here are two futures. One in which Microsoft owns Activision Blizzard and one in which it does not.

That the first of those two outcomes is the more desirable is an understatement. As part of a worldwide marketing campaign over the past year and a half, Microsoft has publicly humiliated itself by belittling the Xbox platform in a bid to make it seem weak and uncompetitive compared to Sony, the market leader in consoles. The result is a more concrete understanding of how far ahead the PlayStation really is, and an explicit admission that Xbox can never, and will never, catch up.

Despite the downsides, this was the right tactic, and most of the regulatory bodies that opined on the merger gave Microsoft the thumbs-up, including rather audaciously, those in Japan, Sony's home country. But there are two malcontents out there that have chosen the wrong target to show they're serious about reining in Big Tech. And those two regulatory bodies, the U.S. Federal Trade Commission (FTC) and the UK Competition and Markets Authority (CMA), have shown the world the danger of Microsoft's strategy. If Microsoft doesn't acquire Activision Blizzard, it must now overcome all of the data it provided that proves that Xbox isn't even competitive.

In a world in which Microsoft goes it alone, nothing changes. Xbox is still the number two console, but now we know that Sony outsells it by 3-to-1 or even 4-to-1, depending on the locale, and that Sony's lead is growing over time, not shrinking. We know that Microsoft still has a huge disadvantage when it comes to exclusive titles and that it has been slow to release major blockbusters while Sony surges ahead, and the few big titles that Microsoft has released recently have been duds or non-events. And we know that Microsoft "leads" in cloud gaming, while understanding that this part of the market is tiny and likely will always be so. Microsoft is a small fish in the big pond that matters to it today (consoles), a big fish in the small pond that will never matter (cloud), and a non-event in mobile. The only good news there is that Sony is too.

Activision Blizzard is about a few different things, including the strength of its big franchises, like Call of Duty, and bolstering its Xbox library Game Pass subscription services with more and better titles. But it's also about mobile and is arguably mostly about mobile. Certainly, Microsoft has made that case as needed, and probably partially to offset concerns about Call of Duty. Here, we see the major hole in Microsoft's Xbox strategy, its Achilles H...