Sony and Microsoft announced that the two companies will partner on new innovations to enhance customer experiences in their direct-to-consumer entertainment platforms and AI solutions. Under the memorandum of understanding signed by the parties, the two companies will explore joint development of future cloud solutions in Microsoft Azure to support their respective game and content-streaming services. In addition, the two companies will explore the use of current Microsoft Azure datacenter-based solutions for Sony’s game and content-streaming services.
The next competitive dynamic of the games sector is centred on the cloud
Recent announcements and market acquisitions from Microsoft, Amazon, Google and Tencent highlight that the next competitive dynamic of the games sector is centred on the cloud. Companies with access to cloud infrastructure, with a scaled and efficient service delivery capability are well positioned to succeed in this next wave of disruption in the games industry.
While Sony, with its PS Now service, is the biggest cloud gaming operator globally with 36% share of the $387 million world cloud gaming market in 2018, it is exposed in terms of cloud infrastructure and service delivery. For Sony to scale its offering in a similar way to that promised by Microsoft with Project X Cloud and Google with Stadia, it needs to partner to compete.
Why would Sony choose Microsoft?
The choice of partnership with Microsoft Azure is a significant development for the shape and competitive dynamic of the games sector. Microsoft is building an end-to-end cloud capability to serve the games industry. Its Xbox and future cloud gaming business is only one aspect of its ambition to grow its exposure to the games value chain. Through Azure and its cloud-based tools and services, it intends to aggressively pursue third-party relationships in infrastructure, back end services and service delivery. The deal with Sony shows it is making significant progress in this ambition.
Sony needs an infrastructure partner to remain competitive as cloud gaming and cloud services start to gain traction. Currently Sony owns and runs its own PSN and PS Now infrastructure but, like other enterprises adopting cloud services, it will be continually reassessing whether this is the best and most cost effective approach to take, especially in the context of deploying its content and services into new markets.
For sure, Microsoft Azure would be a leading partner candidate in this context, but the competition between Xbox and PlayStation make this a significant choice. Microsoft has deep expertise in relation to games service deployment in Azure and it is building out its own cloud gaming service - it is likely this has had an impact on Sony’s thinking when deciding on a partner.
However, the market entrance of significant new players – namely Google, potentially Amazon and the international ambitions of Tencent – will also have prompted Sony to re-evaluate its position in the market. Microsoft too will have considered its position in light of these developments; especially Google’s Stadia strategy. In the context of gaining access to cloud services, when evaluating the market landscape for potential partners, it is clear that Microsoft is the best choice for Sony even with the competitive dynamic between Xbox and PlayStation. Working together they have a better chance to head off competition from the likes of Google, which went on to dominate the last wave of technology disruption in the mobile space alongside Apple.
I do not expect any major industry or market impact in the short term. If Azure is used to support games and content services during the current generation, it may improve Sony’s service delivery performance in certain territories and may help it to broaden its service coverage.
Longer-term is more interesting. If the convergence of the components used in consoles continues into the next-gen of devices, it is possible that there may be an opportunity to virtualise next-gen Microsoft and Sony consoles in the cloud using similar infrastructure. This might provide cost advantages and efficiencies for cloud gaming which would support the transition of games content to the cloud more rapidly over the next five years or so.