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Home / Companies / News /  Sony braces for Microsoft’s ‘pay-to-win’ strategy

Microsoft is flashing its wallet to bulk up in games. That adds up to a fearsome boss battle for Sony, Microsoft’s rival in videogame consoles.

Investors in the Japanese company are clearly feeling some nerves after Microsoft said Tuesday that it would spend $75 billion to buy game company Activision Blizzard. Sony’s share price plunged 12.8% Wednesday, its biggest one-day drop since 2008.

The Activision deal—it would be Microsoft’s largest acquisition—is a clear statement of the Xbox maker’s intent to invest more in quality videogame content. The transaction would boost Microsoft’s game library, especially in what are known as AAA games—big-budget titles like “Call of Duty." The technology giant completed its $7.5 billion purchase of ZeniMax Media, the owner of popular game franchises like “Doom" and “Fallout," last year.

Sony may suffer directly from the deal if Microsoft decides to pull some Activision titles out of Sony’s PlayStation console, making them exclusive to Xbox. Citi estimated that the potential profit hit from losing that royalty income could amount to 10 billion yen to 30 billion yen, the equivalent of $87 million to $260 million. But that is relatively minor: Sony’s operating profit for the 12 months ending in September was around 1 trillion yen.

The bigger worry for Sony investors is how the gigantic deal could shake up the videogame industry writ large. Sony had been leading Microsoft in the console war. A better content library might push more gamers toward Xbox.

And Microsoft’s ambitions go beyond consoles. The company has a Netflix-like subscription service called Xbox Game Pass with more than 25 million subscribers. The service is available on personal computers and enables users to stream games on mobile devices over the cloud. The Activision deal could help the service attract gamers across devices. Activision also has a strong presence in mobile games, with top-grossing titles like “Candy Crush Saga" and “Call of Duty: Mobile."

Sony in turn might have to splash more cash to keep up. Shares of game companies in Japan and elsewhere mostly went up on the news. Capcom rose 4.6%, while Square Enix gained 3.7%. Take-Two Interactive’s proposed $11 billion purchase of Zynga this month also helped push up the valuation of potential acquisition targets.

But Sony should move carefully, especially since it can’t possibly compete with Microsoft on financial prowess alone. Microsoft’s operating profit is around eight times Sony’s, according to S&P Global Market Intelligence. Sony needs to keep beefing up its content, but it should focus on buying and partnering with smaller, independent game studios rather than super heavyweights like Activision. The company’s other entertainment assets—it owns a major Hollywood studio and a major music label—could provide an edge.

Microsoft’s megadeal ups the ante in the war for content. Sony will need to play smart to stay ahead.

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