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Xbox’s Bethesda acquisition is evidence of blockbuster gaming’s volatility

Microsoft’s Xbox gaming division is acquiring The Elder Scrolls V: Skyrim publisher Bethesda for $7.5 billion. And it’s difficult to overstate how much this changes gaming. The easiest way for me to think about this is that Xbox just bought one of the only other companies that actually has a major media presentation during E3 (the Electronic Entertainment Expo trade show) each year. This has led to a lot of talk about what the purchase means for Xbox and its Game Pass subscription service. But the deal tells us just as much about how unsustainable the triple-A blockbuster gaming business is.

Bethesda is one of gaming’s main publishing companies. Like Ubisoft, Electronic Arts, and Take-Two, it built a business by creating studios and releasing games for PC and consoles. Its biggest releases are megahits like The Elder Scrolls V: Skyrim and Fallout 4. And yet the owners of ZeniMax Media — the parent corporation of Bethesda — sold off their interests in the gaming business to Xbox. Why? What is happening in games that would make ZeniMax stakeholders want to cash in?

Well, the explanation is evident in the recent history of Bethesda, and it speaks to the challenges facing the entire games-publishing business.

One flop away from failure

Making video games is a difficult and volatile business. Blockbuster budgets inflated over the last 10 years to well over $100 million for a single, top-tier release. And that makes every game a massive bet that could prove disastrous.

On top of this, publishers and developers struggle to predict what consumers will want. The audience has fickle tastes. And even when a studio is working on something with proven appeal, like a military shooter, they must compete against ingrained properties often from teams with even bigger budgets.

This leads to escalating investment costs as studios try to compete. Is your game not as pretty as Red Dead and not as big as Assassin’s Creed? Well, that sounds like a game I can wait to play until it’s on sale.

Live-service games come for us all

The especially tough thing for publishers is that even if they launch a high-quality game to good reviews, it’s often not enough to pull an audience away from their chosen live-service games. More players are returning to evergreen hits like Fortnite, Rainbow Six: Siege, and Warframe repeatedly for months and years at a time.

In that environment, it often seems like only the most prestige single-player narrative-driven games breakout from the crowd. This raises the threshold for what games can succeed. This is why you’ll often hear people lamenting that the middle-tier game is disappearing. The threshold for success is higher than ever. On the PlayStation 2 and then the Xbox 360, a “B” game could make a return on its investment. Now, they struggle to pull any attention away from whatever is hot on Twitch at the moment.

That can leave publishers feeling like the only safe bet against this trend is their own live-service games. But these are just as hit driven as any other game. The only upside is that developers have a better chance of slowly building a service game into something more appealing over time.

Subscriptions and stores

The other way to compete is to start your own distribution store, your own subscription service, or both. If a company can directly monetize their audience, this can offset some of the increasing costs of development. No more sharing 30% with Steam. And establishing steadier and more predictable revenue streams.

But the challenge is that starting your own PC digital store is expensive. Epic Games continues to invest heavily into its Epic Games Store, and it’s still struggling to compete with Steam. And a subscription service requires a huge upfront investment to build content without any guarantee that players will stick around.

Bethesda tried everything

Bethesda ran into all of the problems I listed above.

It tried to compete with high-budget single-player experiences. At E3 2017, the company even had an initiative called #saveplayer1 about ensuring the future of solo games. That led to games like a Dishonored 2 expansion, The Evil Within 2, and Wolfenstein 2: The New Colossus. But none of those games were huge financial successes, even if they all are beloved by their fans and received positive reviews.

Bethesda then tried to launch the live-service game Fallout 76, which had a disastrous release (although it’s slowly building an audience through updates that have improved the game). That game likely would have performed better if Bethesda would have delayed it, but — again — making games is difficult. That’s the point.

The publisher also tried its own store with the Bethesda Launcher on PC, only to witness EA soften its position toward running the EA Origin store. It also saw companies like Ubisoft and EA try their own subscription services. Bethesda knows how expensive and challenging it would be to get those programs off the ground. And in the end, Steam and Xbox Game Pass are probably still going to win in the end.

The reality is that the industry is going through a massive shift where publishers probably aren’t going to look like the company Bethesda grew into. That left its stakeholders with an option: Try to figure out the painful process of transforming Bethesda into something new, or sell Bethesda to a company that needs it. And Microsoft can use Bethesda because Game Pass is already a de facto industry standard with 15 million subscribers.

This deal ensures that the people and teams that make up Bethesda have a chance to remain together. The alternative under an independent ZeniMax Media was likely closures, layoffs, and fewer games. And I guess that’s the good news for fans. This deal will get you more games.

Meanwhile, if you’re one of the people on the receiving end of that $7.5 billion payday, take that money. In a few years, gaming’s tectonic plates will settle into place — at least momentarily. And then you can start your next gaming startup when you know what the future looks like.

Media consolidation is bad, but so is everything

Not to give into nihilism, but I can only get so worked up regarding concerns about media consolidation. This Microsoft move echoes Disney’s efforts in film and TV, but it’s not like the status quo in gaming has led to a dynamic and healthy market. And ZeniMax’s options here were likely shrinking down to either selling or aggressively reorganizing. Business as usual was probably not under consideration.

And the reorganizing option would have led to studio closures and layoffs. Under Microsoft, the plan (for now) is to let Bethesda keep operating as it always has. It seems like most of the people involved will continue in their current positions. The only difference is that Satya Nadella will sign their paychecks.

So yeah, media consolidation is bad and reduces competition. But game publishers are so afraid of the aforementioned risks that we don’t have a ton of competition in the blockbuster segment as is.

Ultimately, I view Microsoft’s Bethesda acquisition as an enabling move. It is purchasing eight new studios to empower them to keep making games. This is distinct from prohibitive moves where a company pays a publisher a fee to keep a game off of a competing platform.

It’s hard to say that the deal is good for the game industry, though. But for now, it’s probably better for the people making games at Bethesda.

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