For 2 decades now, Sony’s PlayStation series has been battling it out with Microsoft’s Xbox for dominance in the console-based gaming market. The next round of the ongoing head-to-head will now play out over the upcoming Christmas period and beyond after both technology companies this month unveiled their latest iterations on their consoles – the PlayStation 5 (PS5) and Xbox Series X.

Xbox revenue is far from unimportant to Microsoft but over the fourth quarter of its 2020 fiscal year, to the end of July, the U.S. tech giant generated $38 billion of revenues. Of that total, less than 10% is generated by gaming hardware and software sales. For Sony, gaming revenue forms a much larger portion of the company’s overall income. Over the fiscal year to March 2021, Sony expects its gaming business to bring in around 30% of its total revenues and account for 40% of the company’s operating profits.

That means the outcome of the fourth time Sony’s latest PlayStation has gone head-to-head with Microsoft’s latest Xbox, will go a long way to defining it success as a company, and share price, over the next few years.

The Covid-19 pandemic has been a positive for the gaming industry, which had anyway been in a pattern of strong growth, expected to continue for the next several years. Gaming sector data company NewZoo estimates the market’s global value at having reached $45 billion. So there’s plenty to play for.

With the PS4 released as far back as 2013, when the Xbox One also came to market, hardware revenues have dropped off over the past couple of years. The new releases should reverse that trend, with console gaming fans eager to see what the next generation machines will offer.

The Battle Will Turn On Games Titles And Business Model, Not Hardware

Both new consoles will be priced at $499, likely to be around the same figure in pound sterling for UK buyers. That means that unlike in 2013, when Sony undercut Microsoft by pricing the PS4 at $100 less, which was a roaring success, there will be little to differentiate the choice of hardware for gamers deciding to buy one console or the other.

There is also little to differentiate the two consoles in terms of their computing power and processing capacity. Neither will be able to support more sophisticated games than its rival. Which means the victor will be ultimately decided by which console offers the unique titles favoured by gamers, as well as the business model behind how those games are accessed. That’s where the big differences between the two are to be found.

Sony Sticking With The Tried And Tested While Microsoft Moves To A Netflix-Style Subscription Model

Industry analysts believe Sony probably has the edge on Microsoft when it comes to its flagship titles. The Japanese giant has invested heavily in developing titles in-house, bolstered by the acquisition of several top games producers. This month Sony showcased several of its exclusive and in-house games, including Spider-Man: Miles Morales and Resident Evil 9.

Microsoft has also fought back, buying a number of gaming studios itself. But David Gibson, a gaming industry analyst at Tokyo-based Astris Advisory, told the Financial Times “Spiderman will beat Master Chief (referring to Microsoft’s Halo series) easily.”

Microsoft will be confident it still has enough its locker in terms of games to be competitive against Sony’s line-up. It’s partnership with Electronic Arts is a major plus. But it is on business model that it has focused its strategy, drawing from experience and success in recent changes one of its other major business units – professional productivity software.

Microsoft has reclaimed its position as one of the most successful and valuable companies in the world in no small part due to switching its Office suite business model from a one-off software license payment to a subscription model, with recurring monthly or annual payments.

The Xbox Series X will take a similar approach. Microsoft is taking a longer view than this particular console face-off with Sony and is carefully watching Google and Amazon’s moves into cloud-based gaming. That’s reflected in the Xbox Game Plus Ultimate, with its Netflix-style subscription service.

For a monthly fee of significantly less than the cost of a single premium PlayStation title, Xbox gamers will have access to an extensive library of games, new and historical, including over a hundred titles from previous Xbox consoles and future releases by Microsoft and EA. It’s not even necessary to buy the console, with many of the games also available to play on a PC.

There is a feeling Microsoft is targeting the larger audience of casual gamers, while Sony is focusing on the dedicated gamers who are likely to spend much more money per head.

TJ Erickson, editor-in-chief at gaming media Generation Xbox comments:

“Sony wants consumers to buy into a specific console in the PS5, whereas Microsoft is encouraging consumers to engage with the Xbox ecosystem in any way they choose.”

Move To Digital Only Games

The PS5 also indicates the market trend towards digitally downloaded games with a cheaper ($399) model that doesn’t contain a disk drive and can only play downloaded games. Minami Munakata, an Goldman Sachs analysts, believes this will accelerate the trend towards digitally downloaded or streamed games. Digital-only games currently account for 51% of all new games sales, and Ms Munakata sees this rising to 80% within 5 years.

Are The PS5 And Xbox Series X The Last Consoles?

While Sony has commented that it can’t say if there will ever be a PS6 or not, but highlighting that many experts said there would never be a PS5, there is a strong feeling the upcoming battle in the Sony vs. Microsoft console wars will be the last.

Not that gaming will decline as an industry. Far from it, the sector is expected to continue to grow strongly. But it is moving away from hardware and towards cloud-based streaming, that will require only an internet connection and a screen and controller. And subscription models.

Sony hasn’t completely ignored the subscription format and 45 million of the 113 active monthly users on the PlayStation network subscribe to its Plus programme. But the PS5 will still rely a lot on sales of premium titles only available as stand-alone purchases.

It will, however, have to use that as a platform to manage a transition to a subscription business if it wants to remain relevant, especially in light of the new competition from Amazon, Apple, Google, and surely it’s only a matter of time before Netflix moves into gaming too. Citygroup’s Kota Ezawa believes there will be no PS6 as gaming will have moved entirely online. But he emphasises how important the PS5 will be for Sony’s future with:

“The PS5 will determine whether Sony becomes one of the top global players in the subscription business. In that sense, the success of the PS5 will be even more critical for Sony than PS4.”