How Microsoft is replicating the Netflix model for its gaming business

Microsoft (MSFT) is one step closer to closing its deal for Activision Blizzard (ATVI) after UK regulators accepted some of the changes Microsoft made to get the regulators' sign-off. Microsoft made concessions on cloud gaming in order to get the approval. Wedbush Managing Director of Equity Research Michael Pachter says Microsoft is making a "brilliant" move in terms of cloud gaming, one he likens to Netflix's business model. Watch the video above to find out why.

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Video Transcript

AKIKO FUJITA: The cloud gaming space, you know, really at the center of this, is still a very nascent space. It's not a big chunk of gaming overall. But I wonder, what you make of this concern that was brought in terms of, you know, where Microsoft's, you know, the biggest game console maker would take the games from Activision Blizzard? I mean, what does that tell you about the competition or the rate of growth that we're seeing in this space?

MICHAEL PACHTER: So the UK was completely off-base and just downright idiotic. The guys who own the content are going to control what happens in streaming. And if they license their content to streaming the way the US media companies license to Netflix, they will allow someone to gain a huge competitive advantage. And in fact, what we're seeing in the strikes reflect is it's hurting cable. People are cutting their $85 cable bill. And they're not watching $65 worth of ads, instead they're switching to $30 or $40 or $50 worth of streaming services. That is suboptimal. $150 shifts to $50, somebody lost 100 bucks. But guess who gained 100 bucks? Consumers.

So the Netflix model is good for consumers. Microsoft is replicating that with games. But the difference is you have to buy a console, play console games. So that market is only about 250 million households. And you have to have a pretty good PC to play PC games, maybe in the aggregate 400 million households, out of 1.7 billion on the planet or 2 Billion Microsoft's going for the 2 billion market. So they're looking at streaming as way to expand consumption of the content and generate more revenue and profits for them by pushing it out.

Think mobile phones 20 years ago when we all paid 150 bucks a month per phone. And now we all pay $40. But guess what? There's 5 billion phones so there's more profit for everybody and the service gets pushed out. That's what Microsoft's trying to do. It's brilliant. And the one thing that was holding them back was content. They only produce about one good game a year, then they bought six studios, so they're up to like two, maybe three. Then they bought Activision, they're up to five.

So, you know, they're not dominant yet. But they're giving us enough content that that subscription makes sense. And if you don't have $500 to buy a PlayStation or Xbox, it really makes sense to sign up for streaming. So I think they're going to win. I think streaming is going to grow to a couple of hundred million subscribers. I don't think anybody can compete. Google tried, they failed. Nvidia's sort of trying, they're not doing very well. Sony is trying, they're not doing very well. Who's going to compete? Amazon? I don't think so.