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Microsoft seems to be past the console wars and is releasing new Xboxes alongside Sony's PS5

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A customer carries a PlayStation 5 console in an electronics store in Sydney on November 12, 2020, the day the PS5 officially launches.

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Microsoft and Sony released new video game consoles this week: Microsoft has the Xbox Series X valued at $ 500 and the Series S valued at $ 300, while Sony has two PlayStation 5 models starting at $ 400.

The last generation of consoles released by the two lasted about seven years. With the latest systems, Microsoft and Sony are employing different strategies to attract gamers and generate even more revenue from gamers.

Much is at stake.

The pandemic has given people more free time to play. Gamers could stay addicted for years, which is big business for both companies.

Gaming accounts for 24% of Sony's sales. It accounts for 8% of Microsoft's sales, but Microsoft is the third largest publicly traded company after Apple and Saudi Aramco, and any success at gaming can benefit many shareholders.

What happened the last time

When Microsoft launched the Xbox One in 2013 and Sony released the PlayStation 4, Sony shipped 4.2 million new consoles, ahead of Microsoft which, according to estimates by tech research firm IDC, shipped 3.8 million.

Sony had set the price of the PlayStation 4 at $ 400, down $ 100 from the $ 500 price of the Xbox One. Microsoft has spent time promoting the Xbox's entertainment capabilities rather than focusing more directly on gaming. First, the Xbox One came with the Kinect, a device that allows users to control the Xbox using voice commands and motion gestures. It wasn't a huge hit, and Microsoft eventually released a $ 400 Xbox package that skipped the Kinect in 2014.

In later years, PlayStation 4 owners were given access to exclusive games not available on other systems, including Uncharted 4, Horizon Zero Dawn, and Spider-Man. Xbox One has a number of its own exclusive products, including Halo 5.

According to IDC, the PlayStation 4 has sold the Xbox One every year.

Microsoft has tweaked its approach to gaming since Xbox One launched. Phil Spencer, executive vice president of games at Microsoft, said in an interview with Verge last year that console shipments, the usual measure of success, are not as important as engagement, including the number of players.

The shift follows revolutions in other Microsoft products under Satya Nadella, who replaced Steve Ballmer as CEO in 2014. The company no longer insisted on defending Windows. It released versions of its office apps for Android and iOS and brought the team productivity app in the office suite to Linux, the open source operating system. Linux became accessible on Windows. Microsoft began migrating Office customers to subscriptions and gave away Windows 10 for free.

Satya Nadella, CEO of Microsoft, speaks to attendees during the Viva technology show at Parc des Expositions Porte de Versailles on May 24, 2018 in Paris.

Chesnot | Getty Images

The new Xbox Series X and S don't have a list of exclusive new titles like last time. How will Microsoft differentiate itself from others?

The answer is Xbox Game Pass, an online subscription service that allows customers to download a catalog of 100+ games that includes all three previous Xbox consoles – all for just $ 10 per month. Microsoft plans to add new titles to the service over time, just like Netflix does with video.

Microsoft's offering is broader than Sony's new PlayStation Plus collection, a similar service with 20 PlayStation 4 games that users can play when they subscribe to the online multiplayer service PlayStation Plus, which is $ 5 a month costs.

Game Pass subscribers who pay an additional $ 5 per month get access to a service for playing Xbox games on Android devices. The games are delivered over the Internet from Microsoft data centers. (Microsoft wants to provide a similar service to iOS devices, but says Apple's App Store policies prevented it.)

The mobile option is sort of an answer to the Nintendo Switch that offers powerful gameplay in a portable design. Sony's PlayStation Now cloud gaming service does not support mobile devices.

Studio offers

More games are coming.

Microsoft's gaming wing was on a buying frenzy with 23 game development studios, including those stemming from Microsoft's $ 7.5 billion acquisition of Zenimax announced in September. It's up from 11 in 2018 and larger than Sony's 14 studio collection. Microsoft has reached out to game developers in Japan, home of Nintendo and Sony, Bloomberg reported earlier this week.

Microsoft's Studio 343 Industries was due to release the next installment of its popular "Halo" series of sci-fi shooter games this holiday season along with the new Xbox consoles. However, in August the company announced that the game would be postponed until 2021.

In contrast, both the PlayStation 5 for $ 500 and the PlayStation 5 Digital Edition for $ 400 (without a drive) can enjoy exclusive games like "Marvel's Spider-Man: Miles Morales" and "Demon & # 39; s Souls" play. The PS5 also has a software overhaul and an extensive controller design.

Without these features in the new Xboxes, users are looking for hardware improvements as a reason to choose Microsoft.

They're there, but they may not be enough to topple Sony.

What Microsoft is interested in now

"I don't see any technology in this generation that is obviously affecting the content," said Seamus Blackley, the ex-Microsoft employee who was recognized as the father of Xbox and who first pushed Microsoft to acquire Sony.

Blackley has tried Microsoft's new gaming hardware and said he thinks Sony's PlayStation 5 will at least have the upper hand first.

IDC agrees with Blackley's expectation. Lewis Ward, IDC's research director for games, expects Sony to sell up to 5 million PlayStation 5 consoles this year, and Microsoft sees 3.8 million Xbox Series X and S consoles. (Microsoft will sell every console it makes this year and is expecting a record vacation in terms of gaming usage, Jerret West, chief marketing officer of Microsoft's Xbox business, told CNBC. Tim Stuart , Chief financial officer of Microsoft's Xbox business, said Jefferies analyst Brent Thill on Thursday expects supply to outpace demand in the fourth and first quarters.)

Investors are less focused on Microsoft's console sales anyway. Last year, the company introduced a new metric: revenue growth in Xbox content and services, including subscriptions to Game Pass and the long-running Xbox Live service for online games, and sales of popular games like Minecraft for non-Microsoft devices. That number has outpaced total gaming revenue growth for the past four quarters.

Additionally, higher console sales won't necessarily help Microsoft's finances. The more console revenue Microsoft generates in its current fiscal year ending June 30, the lower the company's gross margin will be, Morgan Stanley analysts Keith Weiss and Josh Baer wrote in a statement to customers last month.

"I think Sony will likely get out of the market faster with hardware sales, but I don't think Microsoft will care," said Ben Throop, founder of Vermont game development company Frame Interactive. He's worked on several PlayStation games and expected to buy a new PlayStation and Xbox – just not right away. He said Microsoft, unlike Sony, is more focused on attracting Game Pass subscribers than moving consoles.

West countered that Microsoft has the most powerful console ever made, claiming that selling consoles is absolutely important.

"However, focusing on the console is an incomplete way of assessing the gaming industry and its future growth," he wrote. "Developers who work with us can reach players through the cloud on PC, consoles and mobile phones. And all new players who pick up their games have as many choices as they should play."

CLOCK: Next-gen Xbox and PlayStation consoles face a "challenging battle": Analyst

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Katherine Clark