Microsoft Corporation (MSFT): 1, 2, 3, 4…I Declare a Console War

On May 21, Microsoft Corporation (NASDAQ:MSFT) finally announced their new gaming console to the marketplace: the Xbox One. The console was revealed in a big webcast event that featured development teams from Microsoft and representatives from gaming studios like Electronic Arts Inc. (NASDAQ:EA) and Activision Blizzard, Inc. (NASDAQ:ATVI), makers of the successful “Call of Duty” franchise. Billed as one of the most revolutionary consoles of its era, Microsoft has staked out its place against Sony Corporation (ADR) (NYSE:SNE) for later this year when both companies will release their shiny new systems to the general public. For Microsoft, this is the biggest release since the Xbox 360 came out in 2005. Riding recent sales successes against companies like Sony and Nintendo, Microsoft is hoping that success can carry them into the next battle of the console wars. With Sony mulling a break-up of the company’s electronics and movie businesses, it seems like a perfect opportunity to strike.

The big wild card in this new stage of the console war is that the past decade has seen huge leaps in portable gaming that have made bulky video game consoles almost old-fashioned. Thanks to smartphones like Apple Inc. (NASDAQ:AAPL)’s iPhone and various Android deployments, as well as online app markets like Google Play and Apple’s App Store, developing and playing games has gotten incredibly cheap. The challenge for Sony Corporation (ADR) (NYSE:SNE), Nintendo, and Microsoft Corporation (NASDAQ:MSFT), the so-called “Big Three” of the video game industry, is to stay ahead of smartphone development and make it essential to buy one of the new consoles.

Not just for video games anymore

According to the company’s website, Microsoft has designed the Xbox One to be a “social” platform with programs that can allow the user to record in-game moments with a Game DVR, Skype friends while playing video games or watching movies, watch Live TV through a cable box hookup, and have the entire experience be voice-controlled instead of using a remote. Microsoft Corporation (NASDAQ:MSFT) has also made a deal with the NFL to make watching football games more interactive by integrating fantasy football statistics and in-game notifications to the console. The console’s Skype connection can even be used to trash-talk your fantasy opponents. It’s a lucrative deal that should benefit both entities, and perhaps even enhance the viewing experience of America’s most popular sport. This is the kind of interactivity that puts gaming consoles at an advantage over phones (at least for now) since phones can’t multitask as well as a console that has more computing power and a hook up to a larger screen.

EA chief: Goodbye PC

One company that stands to gain from the new console war is Electronic Arts Inc. (NASDAQ:EA). Electronic Arts executive Rajat Teneja has called these two systems “generations ahead” of the highest-end PCs, marveling at the powerful new console operating systems and enhanced interactivity. EA has been so wowed by the consoles, in fact, that PC users will soon see EA’s hit franchises like “Madden” and “FIFA” become available only on the new consoles and not on home computers. This is a pretty bold move by EA, since even though PC sales are seeing a decline lately there is a solid core of users that swear by PC gaming. Investors in EA should keep this in mind when the new consoles roll out and the new games hit the shelves, as this is a big risk. It also shows that one of the most successful video game companies is weaning itself off PCs, which could entice more companies to join in such as Activision Blizzard, Inc. (NASDAQ:ATVI) or Epic Games, maker of the “Gears of War” series.

Sony’s way back?

For Sony Corporation (ADR) (NYSE:SNE), Mr. Teneja’s statement is a big boost of confidence after what has been a mediocre decade. With its rumored split looking more likely by the day, Sony will be able to focus on its electronics division just when full focus is necessary to battle Microsoft Corporation (NASDAQ:MSFT). Since Sony is not nearly as big of a player in the PC market as Microsoft, it has more to gain than lose by EA’s console-only approach to popular titles. What this also means is that if the PS4 has good sales numbers when it releases and manages to capture some of the more casual gamers that often buy Xbox hardware, it could silence Sony’s critics and give the company a decade that can make people forget about the last one. The PS4 does have a slight advantage in the processing power of its new machine, with 1.8 teraflops of graphic processing vs. only 1.2 teraflops for the Xbox One. For games that require good rendering such as the “Call of Duty” and “Battlefield” series, Sony’s built-in ecosystem of gamers should stay loyal and the console may attract some of the EA-supporting PC gamers as well.

EA is poised for a run

Sony Corporation (ADR) (NYSE:SNE) is ready to make a good run by the time the new consoles comes out. Once the break-up with Sony Entertainment officially happens, Sony’s stock should do incredibly well. It has already had a roughly 32% increase in share price for the month, and having an all-electronics company on the exchange should help the company further. Microsoft Corporation (NASDAQ:MSFT) is looking pretty stable at the moment as well, posting a 30% gain for the year-to-date and potentially seeing a more lasting upswing upon the release of Xbox One. Microsoft has routinely been a pretty flat company, however, which is great for investors looking for a safe stock to invest in but isn’t so great as a money-spinning stock. The Xbox One, if it is successful, could change that.