Microsoft has been rightly celebrated for its E3 briefing this year, but it was a demonstration of both its current position of weakness and the unique strength that its great rival Sony cannot realistically match.
In the week leading up to E3, Ubisoft CEO Yves Guillemot predicted that there may be just one more generation of console hardware before streaming becomes the ubiquitous platform for games of all kinds. "There will be one more console generation and then after that, we will be streaming," he said. "All of us."
This thread was also picked up by EA CEO Andrew Wilson, who used the E3 stage to speak directly to the growing influence of streaming and subscriptions on how the company thinks about its future. When Xbox head Phil Spencer revealed that Microsoft was actually developing a streaming platform (possibly as a replacement for the download-based Xbox Game Pass), E3 2018 suddenly became about so much more than which games will be released in the next 12 months.
Ultimately, these far-reaching ideas tainted the view of Sony's more restrained briefing, which contained barely a word about its plans for PlayStation Now. Instead, Sony used its position of strength in the market to focus on a handful of big games - a strategy that left many (both in the room and watching from afar) feeling underwhelmed.
"It is possible that a few years from now Microsoft will be the Netflix of gaming and Sony more like HBO"
Joost van Dreunen
"With an install base of 75 million that makes sense for now," says Joost van Dreunen, CEO and co-founder of SuperData Research. "But it does not provide an answer to the question what the future holds. Worse, it is inconsistent with the direction senior management recently revealed - plans to focus on subscription revenue from online gaming and streaming music and video."
Where Microsoft surpassed Sony is in doing both: showing a slate of 50 games (most of them not exclusive, it should be noted) and doubling its first-party studio roster, while also improving Xbox Game Pass and indicating that streaming will be the next step.
"In particular, this last part is promising," van Dreunen says. "Although Microsoft has failed to win the centre of the living room as it originally set out to do, it is setting itself up to become the leader in the digital games market by equally amassing content and focusing on distribution rollout. It is possible that a few years from now Microsoft will be the Netflix of gaming and Sony more like HBO.
"But a digital future is about scale and infrastructure, which means that Microsoft may yet claim the centre."
IHS Markit's Piers Harding-Rolls sees Sony's decision to leave PlayStation Now out of its E3 briefing as a missed opportunity - particularly given the progress made by Xbox Game Pass. That isn't to say that Sony doesn't have bigger ambitions for its existing streaming service though; according to Harding-Rolls, E3 2018 arrived in the midst of widespread disruption in how console games are distributed and monetised.
"Microsoft's cloud division gives the company a natural advantage when trying to build a profitable business"
"As the market becomes more digitally enabled and service based, console companies and publishers are starting to map out their longer term strategies including the building out of subscription cloud gaming services," he says. "There is no cloud-based service that replicate the console offer at present. Indeed, those companies interested in cloud gaming view it as a means to engage a broader audience - an additive play rather than one that necessarily replaces existing practices."
When it comes to streaming, however, what is happening now is less interesting than what will happen in a few years time. Harding-Rolls notes that Microsoft's streaming solution is "likely to be a few years away from launch" - the FastStart technology being added to Xbox Game Pass is a "halfway house" between downloads and streaming - but the strengths elsewhere in its organisation leave it very well placed to be a leader in the new market.
"As the market shifts, Microsoft is strongly positioned due to its Azure capability," he says. "If you agree that the eventual future of games consumption is through cloud gaming services, then those companies with a strong position in cloud are likely to be best placed to benefit from the transition. In this context, Microsoft's cloud division gives the company a natural advantage when trying to build a profitable business.
"While Microsoft competes directly with Sony at present, it will be aware that as it builds its games-relevant cloud offer that it will increasingly compete with the other cloud vendors, all of which have a presence and role in the games value chain. This includes Amazon, Google, Tencent and Alibaba."
"With the amount of financial resources Microsoft has at its disposal there is really only upside"
Microsoft's other great revelation was that it is working on new Xbox hardware, with the clear suggestion that it would be more than one device. In the view of DFC Intelligence CEO David Cole, a new Xbox console is "critical for [Microsoft's] continued relevance in the games industry" - in part because it may not be ready to provide the content necessary to support a streaming service, and in part because better hardware will be necessary to make any AAA streaming service work.
"Under this strategy, Microsoft would try to distinguish its offering by their exclusive content, as Hulu and Netflix do," says Cole. "However, even with the recent acquisitions, Microsoft is looking fairly light on exclusive content. If Microsoft goes to a pure streaming service they will be competing not only with Sony and Nintendo, but the likes of Google and Amazon."
However, while Microsoft is a distant second place to Sony in the current console market, it's important to note just how much stronger the company is as a whole. As Cole points out, when the Xbox One launched, Microsoft stock was trading in the mid-$30 range, at E3 2016 it had increase to $50, and at E3 this year Microsoft shares were selling for $101 each. Sony may appear to be miles ahead when viewed through the lens of the games industry, but the fact is that Microsoft is a much bigger and more successful company overall - and a streaming service for games is quite likely to excite its investors.
"Microsoft clearly has breathing room to look to make a bigger bet on its game business," Cole says. "With the amount of financial resources Microsoft has at its disposal there is really only upside. Microsoft investors in general are not well versed in the video game business. Microsoft stock does not currently trade based on the performance of the Xbox One. However, if investors start hearing that Microsoft could become the Netflix of gaming, that could resonate in a major way.
"The issue with a Netflix of gaming concept is that, for the near future, it is likely to require a fairly powerful hardware system to provide a full gaming experience. Microsoft needs a new console system if it wants to remain competitive. Based on E3 2018 we now think that is likely to be coming."