Why Sony might be the biggest loser in Microsoft’s Activision deal

Morningstar analyst Kazunori Ito told Bloomberg that “falling shares illustrate investors are worried that Sony may not be able to keep winning” in a sector where earnings potential is shifting away from hardware sales and toward software sales. Entertainment brands, like Sony’s PlayStation and Microsoft’s Xbox, currently make most of their money selling games, not consoles.

Until now, Activision’s games like Call of Duty, Tony Hawk’s Pro Skater, and Diablo have been available on PlayStation and Xbox, but investors seem to worry that Microsoft’s $68.7 billion acquisition of Activision will cut Sony’s PlayStation off from some of the world’s most popular titles, eliminating the revenue Sony earns from licensing those games.

Sony has acquired studios to beef up its production of games in house, but it’s unlikely the Japanese brand can compete with Microsoft’s massive spending power, which is fueled by a $130 billion cash pile. As analyst Amir Anvarzadeh told Bloomberg, “Sony will have a monumental challenge on its hands to stand on its own in this war of attrition.” 

For now, Microsoft is promising not to “pull communities away” from PlayStation. Previously, Microsoft has respected deals signed pre-acquisition: Psychonauts 2 was released on the PlayStation 4 in August 2021, two years after Microsoft acquired the game’s developer, Double Fine Productions, in 2019.

But Microsoft’s willingness to sell games on a competitor’s platform is unlikely to last. Months after acquiring ZeniMax Media—the parent company of Bethesda Softworks, developer of the popular Elder Scrolls and Fallout series—Microsoft admitted that future games, including the hotly anticipated Elder Scrolls VI, would not be coming to PlayStation 5.

Sony is facing challenges beyond Microsoft’s growing portfolio of game developers. The global chip shortage forced Sony to scale back production of its flagship PlayStation 5 this fiscal year, too. Despite a brisk start to sales—the PlayStation 5 was the fastest of Sony’s consoles to hit 10 million units sold—supply issues have dragged the PS5’s sales below that of the console’s predecessor, the PlayStation 4.

In November, Sony cut its annual PS5 production targets by 1 million units, and last week Bloomberg reported that Sony will continue to produce its older PlayStation 4 console, which uses fewer semiconductor components, as a substitute for customers unable to snag a PS5.

In the wake of Microsoft’s surprise acquisition, investors appear to favor Nintendo over Sony. Shares of Nintendo—the world’s only other major console manufacturer—largely held steady Wednesday, sinking a slight 0.22% in Tokyo trading.

Nintendo’s Switch, with its combination of exclusive IP and lower price point, has withstood competition from Sony’s higher-performance PlayStation 5 and Microsoft’s Xbox Series X. The Switch was the bestselling console of 2021 in the U.S., the U.K., and Japan, where Nintendo was able to outsell all of its competition combined. 

Shares of other Japanese game publishers like Capcom, Sega Sammy Holdings, and Square Enix Holdings jumped on Wednesday, as investors saw greater value in companies with large portfolios of gaming IP now that console producers are hunting for games to acquire.

Sony is likely to be a bidder itself. As tech analyst Serkan Toto told the Financial Times, “If [Sony is] going to look at buying something, they have a big advantage on home turf in terms of M&A.”