Just a day before the preorders for the next generation of Xbox was to go on sale, Microsoft dropped a bombshell on the gaming industry. Over on the Xbox Wire, Microsoft has announced that they have entered into an agreement to acquire ZeniMax Media, which includes all of their game studios and the talents of the over 2300 employees who are currently employed. This is huge news for Xbox as the landscape for this generation might look extremely different depending on how Microsoft proceeds. Will they use all of the talented studios for Xbox exclusives? Will they be available elsewhere but be on Game Pass on day one to drive subscriptions or will it fall somewhere in between?

Some of the biggest and best games of modern gaming have come from a ZeniMax owned studio. Bethesda Softworks, Bethesda Game Studios, Id Software, Arkane, MachineGames, Tango Gameworks and many other studios bring their famous works to Microsoft. These are some of the studios behind amazing franchises like Elder Scrolls, Fallout, Doom, Wolfenstein, Prey, Dishonoured, Evil Within, Rage, Quake, and plenty of upcoming games including Starfield, DeathLoop and GhostWire Tokyo.

Before getting to off topic about what this means for Microsoft and the rest of the gaming industry, its important to look at the details of the purchase. The cost of acquiring Zenimax is 7.5 billion and will bring the total number of first party studios within Microsoft up to 23, which is a far cry from where they were just a few years ago. Microsoft is a massive company and one of the few companies in the world that is worth over a trillion dollars, which should explain why they have acquired so many companies over the past decade. Outside of the world of gaming Microsoft acquired LinkedIn, and have turned them into a very profitable aspect of their portfolio, they added multiple developers to Xbox Game Studios including Obsidian, Double Fine, and Ninja Theory.

They recently tried to acquire TikTok and in the world of gaming there was speculation that they were interested in purchase WB Games, before WB decided they should not sell. The value that was floating around for what WB was looking for was in the ballpark of 4 billion, which might have been too high for the potential buyers based on their limited franchises. Although i’m sure Microsoft would have loved to acquire WB Games in addition to ZeniMax as the recent acquisition has likely been in the works for a while. In the most recent quarterly earnings call, Microsoft had a revenue of over 38 billion and a net income of over 11 billion, which means that this purchase of ZeniMax for 7.5 billion will be written off in less than a quarter.

One of the best pieces of news is that with the funds that Microsoft will be able to put behind some of these studios, there is a chance that we see future instalments of franchises that might have otherwise ended due to commercial failures despite critical success. Games like Evil Within, Prey and Dishonoured seemed to garner critical praise and cult followings but lacked commercial success.

We are already seeing how this partnership is paying dividends for Game Pass as Doom Eternal is now available on the service, which is a great value add for a critical success that was released only around six months ago. According to Phil Spencer “We will be adding Bethesda’s Iconic franchises to Xbox Game Pass for console and PC”

In the spring of 2020, The Verge ran an article stating that subscriptions for Xbox Game Pass were around 10 million and just this week they ran another article announcing that the amount of subscribers to the service is over 15 million which means that in less than six months the service has increased 50%. Tying the benefit of adding more value to Game Pass being the end goal, Microsoft is able to recoup a lot of the cost very quickly. Assuming that most users are paying the 9.99 monthly for the service, this means that Xbox Game Pass generates almost 150 million per month, which is almost 2 billion dollars a year to essentially let people rent games.

I can strongly assume that when the next generation of Xbox gets released on November 10, those figures will see a significant rise. They will likely see a large rise again when there are massive first party titles like Halo Infinite in 2021, and when they start seeing the fruits of their labour from all of the recently acquired studios, including ZeniMax. Game Pass took the Netflix approach to the best choice available for gamers and since they were ahead of the rest of the industry on their thinking they will be able to capitalize and build a large customer base before the competition catches up.

Netflix now has many competitiors but they are the industry leaders with over 180 million subscribers. I think at around 15 million subscribers to Game Pass, there is massive potential to grow Game Pass to over 100 millions users over the next five years easily, especially if it becomes offered other places outside of PC and Xbox. Just crunching some simple numbers, if Microsoft is able to grow Game Pass to 100 million with the average consumer pay around 15 per month for ultimate, then Microsoft would make somewhere around 1.5 billion per month.

Game Pass is one way that the acquisition of ZeniMax is going to pay dividends for Microsoft but how do they plan to use these franchises moving forward. When comparing Xbox and PlayStation, the winning argument for Sony is that they just have more, better exclusives. This isn’t a secret and everyone is aware of this including Phil Spencer, which is why during the Xbox One generation he began trying to fix the shortcomings of Xbox. One thing about Phil Spencer is that he is as transparent as an executive can be without giving away the farm. In an interview with Bloomberg, Phil said that Xbox will “take other consoles on a case by case basis” referring to how exclusivities will come from this merger.

GhostWire: Tokyo, the latest creation from Shinji Mikami after The Evil Within and DeathLoop, the stylish time bending shooter from Arkane were both set to be timed exclusives for PlayStation. DeathLoop was initially even supposed to be one of the launch window games for the PS5, however it has now been delayed into 2021. I am sure that Microsoft could have made it so that both of these games became Xbox exclusives but decided to the right thing and honour the original commitments that ZeniMax made with Sony. This whole merger is supposed to shine a bright light on Xbox and how they are trying to become the place for consumer friendly moves including Game Pass, Xcloud and exclusives. Taking away the deal in place with Sony would have been a bad look for Microsoft and generated negative press.

In terms of everything else, I do believe that Phil Spencer is being genuine. I think there will be a lot of titles that will become Xbox exclusives and I think that some titles that are too big will be multi platform. When Microsoft bought Mojang, they could have kept Minecraft exclusive to Xbox but instead they understood the big picture and how much revenue that game will generate on other platforms. Selling 10 million copies on Xbox isn’t nearly as good as getting a smaller portion of over 200 million copies that the game has sold.

Skyrim is one of the best selling games of all time, as it has been available on pretty much everything possible. It’s likely the successor to that game will be as successful if not greater. In a similar manner to Minecraft, it makes a lot more financial sense to make a smaller portion off more games sold than a bigger portion from less games sold. I expect to see the next Elder Scrolls be available everywhere but the big way in which Microsoft will drive people to Game Pass is by having games like Elder Scrolls 6 available day and date on the service for free. Sure, you can play it anywhere, but it will cost you 70 dollars, or you can play it on Xbox and have it included with Game Pass for 10-15 bucks a month along with all of the other titles on there. Once more games start getting released this generation the argument for Game Pass will become much stronger than it is now and will become too hard to pass up.

It seems like Microsoft will continue on the same path that they have been going down for the past few years by acquiring developers into Xbox Game Studios. In an interview with Cnet, shortly after the acquisition was revealed, Microsoft CEO Satya Nadella explained how this method of acquiring studios is the more logical path for Xbox. “You can’t wake up one day and say, ‘let me build a game’” emphasizing just how long it takes to create an internal studio and develop a game.

There are massive steps that must be taken from creating the studio to having a game release, including staffing, concept, design, testing, marketing and multiple steps in each category before getting the final product to the gamer. Back in 2018, Microsoft formed an internal studio composed of top tier, experienced gaming talent from within the industry, called The Initiative. We still haven’t heard anything regarding what that team has been working on and although sometimes we are surprised with game announcements that are only months away from release, whatever The Initiative is working on will likely see a long marketing plan. Based on this, it seems unlikely that we will see their product release in 2021, which means that 2022 is four years from when they announced the company. Four years is a long time to gamble on an unknown commodity.

Satya Nadella continued with CNET, explaining that acquiring is a much smarter path for Microsoft to take “We’ll always look for places where there is that commonality of purpose, mission and culture. We will always look to grow inorganically where it makes sense” Seeing a finished product for any one of the ZeniMax studios will likely be produced in a much quicker turnaround than 4-5 years that it would take a newly formed studio. These are established studios with established franchises, that are a much lower financial risk and the openness of Phil Spencer and Satya Nadella is leaning towards Microsoft continuing to acquire more talent in the future.

Moving forward there has been speculation that Microsoft will try to acquire more talent. Companies that have been floated around include Sega, there is always the possibility that AT&T tries to sell WB games again, and there has even been talk that there have been talks for Bungie to come back to Microsoft.

There is lots of potential for anything to happen and this generation is just getting started.