Sony is clearly behind as technology giants move on with their respective ecosystems

As I am writing this post, the shockwaves caused by the Xbox-Activision-Blizzard deal are still being felt. As many Xbox-haters and PlayStation fanboys online could not help but become uneasy and restless because of the deal’s effects on them, Microsoft Gaming CEO Phil Spencer had officially talked with Sony’s top executives and described what happened via his Twitter account.

Take note of Spencer’s words “existing agreements” and “our desire to keep Call of Duty on PlayStation.” Existing agreements most likely refer to what Activision Blizzard made with Sony which I believe are years-long deals on games with regards to platform releases, marketing, post-release downloadable content, etc. Of course, such agreements can last long but NOT FOREVER. The business benefit for PlayStation from Activision Blizzard will someday come to an end. 

As for Microsoft’s desire for keeping Call of Duty on PlayStation, that clearly means that the corporation of Xbox is technically in-charge of not just the COD franchise but on the decision making, marketing and releasing its games on specific platforms. Sony and its PlayStation team are not in the driver’s seat here anymore. Whatever deals Activision signed with PlayStation before the acquisition will expire and they certainly will not be renewed once Microsoft and its Xbox team takes over. In due time, future COD games as well as other upcoming games and new intellectual properties of Activision Blizzard will become Xbox-exclusive in accordance to what Spencer declared before…

“We have games that exist on other platforms, and we’re going to support those games on the platforms they’re on. There are communities of players. We love those communities and will continue to invest in them. And even in the future, there might be things that have either contractual things, or legacy on different platforms, that we’ll go do. But if you’re an Xbox customer, the thing I want you to know is this is about delivering great exclusive games for you that ship on platforms where Game Pass exists, and that’s our goal, that’s why we are doing this,”

This brings me to my next point – Sony as a global business entity is way behind Microsoft, Apple, Google and Amazon when it comes to establishing ecosystems that result tremendous business growth and reaching billions of customers worldwide respectively. The decades-old console-focused approach by Sony with PlayStation was indeed successful but not great enough to help it grow big time. Not even their Hollywood business nor Spider-Man could lift them up greatly. The weird thing was that Sony in previous decades had established an old ecosystem before PlayStation began.

To put things in perspective, posted below is a long excerpt from a recent Nikkei Asia article. Some parts in boldface…

The 10% drop in Sony’s stock price this week following Microsoft’s announcement that it will buy game content developer Activision Blizzard shows the market has belatedly awakened to an existential flaw in Sony’s kingdom. It lacks an ecosystem.

In terrifying contrast, Microsoft is a formidable ecosystem whose component elements, such as devices, operating system, browser, search engine, applications, content, cloud memory, work hand in glove to suck in captive users and never let them go. The ecosystem effect is all too familiar to owners of PCs that run on the Windows OS, which maddeningly redirects users to Microsoft’s Edge browser and Bing search engine against their will.

It is no accident that five of the world’s seven largest companies by market capitalization — Apple, Microsoft, Alphabet/Google, Amazon and Meta/Facebook — are ecosystems. Every consumer decision to buy a device, be it a PC, smartphone, Kindle reader, or game console, entails a surrender to an interconnected ecosystem. Promiscuity among ecosystems is possible but, by design, not easy. The ecosystems are at war and want to make you their captive.

Ironically, Sony was early to recognize the strategic significance of the ecosystem effect. Its decision to acquire CBS Records and Columbia Pictures in the late 1980s was inspired by the notion that controlling entertainment content could somehow push device sales, such as Betamax VCRs and Sony Walkman.

What Sony overlooked was that it would be self-defeating to make its controlled content exclusively available on Sony devices. Very few consumers would buy a Walkman just because it was the only way to listen to Michael Jackson. And Sony’s refusal to license Michael Jackson to non-Sony device users would perversely shut down third-party royalty revenue from the controlled content. Sony saw, but misunderstood and misapplied, the ecosystem effect between devices and content.

Sony’s next, more costly, wrong turn was its failure to anticipate and keep up with the morphing of portable audio devices like the Walkman launched in 1979 and iPod in 2001 into the iPhone debuted in 2007. The iPhone integrated, in a single handheld device, all of the functions formerly provided by the multiple discrete products in Sony’s consumer electronics lineup: phone, TV, camera, video and audio player and recorder, clock, calculator, and so on.

Sony’s stock price plunged from 30,000 yen ($260) per share in 2000 to 1,668 yen in 2009. Sony and the entire Japanese consumer electronics industry are still in disarray from the iPhone paradigm shift.

Unlike Sony, Apple founder Steve Jobs was a master at creating and orchestrating an ecosystem. In particular, he understood when to link content exclusively to a device and, just as important, when not to. Even now, Apple’s iOS is available only on Apple devices, unlike Microsoft’s device-agnostic Windows OS. Initially, Apple’s iTunes music store platform was available only on Apple’s own devices. Then, in October 2003, “the day that hell froze over,” Jobs made the strategic decision to make iTunes compatible with and freely downloadable by non-Apple devices.

The result was not only to massively increase the audience and revenues of the iTunes platform. Non-Apple device users discovered how great iTunes was and that it worked even better on an iPod, leading to a surge in new iPod owners conveniently prepped for the coming transfiguration of the iPod into the iPhone.

The same interplay between devices and content is at the center of intense competition in the $180 billion global PC gaming industry. Dedicated gamers have a choice among three game-specific consoles — Microsoft’s Xbox, Sony’s PlayStation and Nintendo’s Switch.

The choice of device, in turn, entails a menu of device-specific exclusive content. Xbox and PlayStation each offer about 2,000 titles, but the bestselling 200-300 games for each tend to be exclusive to one or the other. A gamer’s choice of console implies a decision about preferred content.

But the relationship between game devices and content is evolving rapidly, tracking changes elsewhere in the internet universe. Games today can be played on any device, PCs and smartphones, not just a dedicated game console.

Gaming is now mobile. Game content is increasingly being streamed, just like Netflix and Amazon Prime. You can play games on YouTube. And an Xbox can be used as a PC to surf the Internet and do your homework.

The immediate threat to Sony posed by Microsoft’s acquisition of Activision Blizzard is that Microsoft will make the content it is acquiring — global blockbusters like Call of Duty and World of Warcraft — exclusive to Xbox users and invite defections from PlayStation users who want to keep playing their favorite games.

But this is just one element of the multifaceted ecosystem effects Microsoft can deploy to squeeze Sony. Sony should be nervous, for example, that it has no cloud or streaming capability of its own and relies on Microsoft’s own Azure platform to deliver streaming content to Sony users.

Sony’s game and network services segment now accounts for 30% of its revenues. It is hard to see how Sony can compete in the long-term in a narrow game-specific segment without credibly competing with the likes of Microsoft, Alphabet/Google and Amazon across the board in all segments of the device-content spectrum.

From a financial point of view, Sony is not only behind the tech giants with ecosystems. Sony simply does not have the major financial muscle needed to pull off massive acquisitions of game publishers (massive meaning more than $5 billion per each acquisition) that each have lots of game developers, intellectual properties and technologies. The Japanese giant does have a business ecosystem but it’s too small and too narrow compared to its Western competitors. This also means Sony reaches much less customers worldwide.

In a possible response to Xbox-Activision-Blizzard deal, Sony can try to acquire its fellow Japanese gaming entities like Capcom, SEGA or Square Enix and integrate the entity(s) into PlayStation, but that will require not just a whole bunch of money but also willingness to not just make big offers the other party cannot turn down, but also the willingness to overcome all the legal obstacles, solve all the complications, absorb all the employees, fund future projects already in development, etc. If the PlayStation team is willing on building up its very own exclusive properties, they could expand the work forces as well as the projects of their very own game studios.

The Xbox-Activision-Blizzard deal is very hard to match not just because of the financial value and organizational weights involved, but also because the said deal covers consoles, Windows PC, mobile devices, cloud gaming, browser gaming and much more. The PlayStation ecosystem is still console-focused and so far team PlayStation released only a few of its games on PC. Is Sony even working to improve PlayStation Now? Are the PlayStation executives realizing that their 3rd party marketing deals won’t lift up their corporation and consumer base anymore? Has it occurred to the PlayStation executives that future games of the Crash Bandicoot and Spyro The Dragon franchises (both of which are permanently identified with Sony’s gaming brand due to exclusive games released on the first PlayStation console) will be released only on Xbox platforms?

As mentioned in the Nikkei Asia article above, business ecosystems are not perfect and they have their flaws that affect customers in bad ways. As such, the ecosystem powers and organizers should do their work to be more user-friendly and be more consumer-oriented. Still, the ecosystem approach to business has proven to be very effective with regards to reaching the widest number of consumers worldwide as well as driving business growth to new heights, not to mention generating economic benefits for business partners involved (example: credit card companies whose users buy on Amazon, Xbox network, Google, etc.) No amount of sales of Final Fantasy games and Street Fighter games exclusive to PlayStation consoles will ever match that. 

As for the console fanboys who still hate Xbox, they should learn to stop living with fantasy and wake up to reality. Time to grow up.

In ending this piece, posted below are videos related to Xbox and the Activision Blizzard deal…

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