21/09/2020   Piers Harding-Rolls
Microsoft's pulls off $7.5bn ZeniMax Media and Bethesda Softworks acquisition coup

Microsoft’s acquisition of ZeniMax Media, owner of games developer and publisher Bethesda Softworks, is a major coup and underlines the growing importance of the games business for the largest consumer-facing technology companies. It gives Microsoft access to a substantial portfolio of very popular games franchises, including Fallout, The Elder Scrolls, Skyrim, Doom, and Wolfenstein which will support its core Xbox Game Pass product strategy and increases its studio count from 15 to 23. The price paid - $7.5bn - is one of the largest in games industry history and perhaps suggests that Microsoft was not the only bidder involved although the benefits the acquisition brings to the company are substantial. Arguably, Microsoft is better positioned than many other companies to realise maximum value from an acquisition of this type.

Why ZeniMax was willing to be sold

While ZeniMax and its games publishing company Bethesda Softworks is rightly lauded by console and PC gamers for its iconic games franchises, like other traditional premium console and PC game publishers, the company has had its commercial ups and downs as it has navigated its way through the fast moving, constantly evolving landscape of the games market. Recently, the company's efforts to modernise the Fallout experience in Fallout 76 was poorly received and led to the title commercially underperforming. With budgets for the types of sprawling games that ZeniMax aims to develop continuing to increase as resolutions and technologies evolve, acquisition by Microsoft with its huge financial resources significantly reduces the company's financial risk. Microsoft's technology and development capabilities means that it is a solid fit to help ZeniMax grow its business and execute on its strategic priorities. It allows the company to focus on its strengths - developing and publishing unique, high quality games.

Microsoft's major U-turn on first-party studios and games

Since 2017, Microsoft has completely reversed its strategy on in-house games studios and first-party content. During the last two years Microsoft's in-house dev studios have increased from 6 to 15 prior to the acquisition of ZeniMax. There is both external and internal reasons for this strategic shift. During this next competitive phase of the games sector we expect the value of owned games IP to rise substantially due to increasing competition from major new market entrants, the globalisation of the sector and the arrival of new storefronts and services. Under these conditions it is harder for platform owners and service operators to secure exclusive content from third-parties so having your own studios to produce games is critical to success for a company such as Microsoft.

Significantly, this strategic shift has also coincided with Microsoft's Xbox Game Pass content subscription product strategy which also launched in 2017. Like other entertainment subscription services, Xbox Game Pass needs new and fresh content to reduce churn and increase adoption. All new releases from Microsoft's first-party studios go straight into Game Pass at launch and with the target of releasing a new game every quarter, the company needs a full pipeline from multiple studios to make this happen. Xbox Game Pass is now home to 15 million active subscribers up from 10 million in April, 2020.

How this improves Microsoft's competitive strength

First party content and services, alongside technology (Azure cloud, developer tools, Xbox hardware, streaming software) and the Xbox community of gamers are the underpinnings of Microsoft’s strategic ambition in the games sector. It will help the company compete with Sony directly and also help it expand to reach new audiences through its Xbox Game Pass and cloud gaming initiatives. Microsoft has often been criticised for its lack of heavy hitting first-party games franchises when compared to Sony and Nintendo. This deal catapults Microsoft’s games portfolio into a much stronger position and allows it to once again highlight the growing value of Xbox Game Pass/Ultimate, its key competitive USP versus Sony.

How and when will this impact Microsoft's games market performance?

As soon as the acquisition completes, it is likely that Microsoft will add popular catalogue titles from ZeniMax/Bethesda's portfolio into Xbox Game Pass. This will have an instant impact on the value of the service but will not have a significant impact on next-gen console adoption. Additionally, Microsoft has confirmed that upcoming releases from Bethesda that are timed exclusives on Sony's PlayStation 5 - Deathloop and Ghostwire: Tokyo - will continue to be so. Once the period of exclusivity is over, these games can go straight into Xbox Game Pass adding further value to the service. As such, this acquisition is unlikely to have a major impact on Microsoft's ability to sell next-gen consoles - Xbox Series S and X - in the short to medium-term. 

Further along the line when a new wave of Bethesda releases arrive the impact will be more significant. Depending on the appeal of these games, it is highly likely that Microsoft will sell more consoles and grow its Xbox Game Pass subscriber base due to these first-party releases. At this point, we believe Microsoft has three main approaches to when and how it publishes these games: 

  • It could pursue full exclusivity on Microsoft platforms and drive more sales of Xbox hardware and Xbox Game Pass as a result.
  • It could pursue partial or timed exclusivity on Microsoft platforms, but allow the release of these games on competing platforms in the future thus generating additional premium revenue.
  • It could place new games directly into Xbox Game Pass and launch premium versions of the games on competing platforms. This would maximise the revenue potential of the games while also highlighting the value of Xbox Game Pass.  

At this early stage we have not adjusted out next-gen console installed base outlook based on this acquisition, but will be closely reviewing expected sales in 2022 onwards when we believe the major impact will take place.


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