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Gaming activities will 'only escalate' after launching new PlayStation, Xbox consoles: Analyst

Jefferies Analyst Brent Thill joins Yahoo Finance to discuss the successful launch of PlayStation and Xbox's new consoles.

Video Transcript


ZACK GUZMAN: Well, welcome back to "Yahoo Finance Live." If you know a gamer out there-- perhaps it's your d they're probably stoked by the new release of the next gen consoles between Xbox and Playstation out with their consoles now. We've talked about this being a big battle between the two giants. But it could perhaps be one where both sides win.

Let's break that down here with Yahoo Finance's Dan Howley along with Brent Thill, a Jefferies analyst who covers the space. And Brett, I'll start with you here because that is the question mark. Obviously, there's been a lot of demand in lockdown, in 2020. Talk to me about what you're seeing play out as both these consoles come to market.

BRENT THILL: You know, this is a really exciting cycle. You know, when you look at the Xbox, it's already sold out on the preorders. I've never seen the preorders sold out. Why can't you just take get a ticket and say, hey, we're going to fulfill? So we've had multiple conversations with Microsoft-- you know, why not open up this even broader? But I think they're trying to create the velvet rope outside the New York nightclub, to say, hey, like, there's more people outside to create the excitement. So no question. Pent-up demand, we're all locked in.

Listening to your previous guest from the University of Minnesota, it sounds like we're going to be locked down a lot during the winter. So gaming activities can only escalate. And the category itself is growing across demographics.

And so we think, ultimately, when you look at this, you've got a soldout situation on the preorders. For gaming, for Microsoft, it's only 8% of the revenue. It's a lower margin business. But it is creating nice recurring revenue, and their Game Pass and Xbox Live subscriptions that we continue to believe that investors love what they're doing here. Many thought they would punk this business many years back. But it's good that they stayed. And their largest acquisition to date now, year to date, is in the gaming space.

ZACK GUZMAN: And Dan right now is juggling both, I believe, over there. Dan, what are you seeing? What do you have in your hands?

DAN HOWLEY: Yeah, I do have the Series X right here. This is it. It's just a big block of block, basically. Microsoft essentially said, we're going to put the best we can as far as performance into a box, and they did just that. And then in my other hand is the Playstation 5 right here. This is essentially the wackiest design I've seen out of a console.

And the thing is, the reason for the size has a lot to do with the cooling because the performance out of these is supposed to be worlds better than what they have right now in the current generation systems. And the more power you putt into something like this, the hotter it gets. That's just how processing goes. And so a lot of what you're seeing out of the size of these is just fans.

But I do-- I want to ask you, Brent, I guess as far as these consoles go, we're talking more and more about cloud gaming. Microsoft, obviously, part of the appeal of the Series X is that they're going to have their Game Pass as part of it, and with that, Game Pass Ultimate, where you'll be able to play some of your Xbox games, or all of your Xbox games eventually on your smartphone or your tablet. You won't necessarily need one of these.

So do you think that this is the last generation where we'll have these absolutely-- I'm trying to lift it up with my other arm-- these absolutely massive consoles? Or do you think that they'll continue to go on for sometime soon?

BRENT THILL: I think it's going to-- we can't definitively call if this is it. But we do think it is coming to an end. And the power of the cloud with Microsoft Azure is effectively powering this. So we think-- when you look at the commercial business with Azure and what Azure's been able to do, one of their biggest reference customers is the Xbox business in riding that kind of demand. We think, from a technical capability, they're actually able to do this now going forward. We think that there is a lot of pressure. Amazon, Google, a number of the other cloud providers are getting into this.

And we think, again, when you look the largest deal that Microsoft did this year, it's 7 1/2 billion was in gaming. It wasn't even in their core enterprise business. So I think what it shows you is they want to own more of the content. They wanted to shift to the cloud. And they wanted to be, to your point, ubiquitous, where my kids could be on their phone. They could be on a console. They could be on the computer. They could be anywhere. And we think that vision is playing out.

So yes, I mean, my sense is this is probably it. But again, I think there is a hardcore gaming community that will still be wedded to these devices for quite some time.

- Brent, we've heard more and more that the kind of a subscription model that we've seen from the likes of Netflix is what we're going to see in gaming moving forward. And you know, we got the announcement from Facebook getting into gaming. We've got Google, as well, and Amazon. Now, how do you think some of those players are positioned when you look at where the growth is going to be in this space? And ultimately, where does that leave a company like Sony?

BRENT THILL: Yeah, I don't cover Sony, so I can't really talk to that. But I can talk to Facebook, Snap, and the rest of his vendors. So even you look at Snap, Snap's adding video games to their platform and what we call snackable all forms of video games, where, you know, you have five minutes between the Zoom call, and you want to play a quick game to clear your mind. You're sitting, waiting for a bus. You're in an airport, right? Those lightweight games, I think, are becoming a lot more attractive. And we've seen that continue to grow as a category.

So we ultimately think that these vendors are all jumping in. And there's going to be diversions, right? We think Microsoft and Sony will own the hardcore gamers. And then the social platforms could own the lightweight gamers. So you want to play a game of backgammon with your mom in a remote situation, great. Go to those platforms.

So we think there is a real divergence. But ultimately, the categories are big enough to support multiple vendors. And the overall growth in the entertainment industry is there to support both these angles that both companies are taking.

ZACK GUZMAN: Yeah, nothing wrong with backgammon with the mom. I gotta say, you know, it might be a little bit different out there. We'll see how the new console launches shake out. Brent Thill, Jefferies analyst, Yahoo Finance's Dan Howley, appreciate you both.