Old Rivals Microsoft and Sony Team Up to Take on New Rivals

In an unlikely pairing, rivals Microsoft and Sony announced last week that they would cooperate on video gaming and cloud data services. The partnership, which would have been inconceivable years ago, comes as both companies jockey for an early lead in cloud gaming, an emerging business that frees gamers from having to download game software onto their consoles.

Instead, gaming fans can pay to stream games to any device, similar to how tens of millions subscribers watch Netflix.

Legacy gaming companies like Microsoft, the maker of the Xbox console, and Sony, which sells PlayStation consoles, are feeling the pressure. The shift to streaming risks hurting their long-successful console businesses while unleashing a wave of new rivals like Google that have debuted or plan to debut their own game services.

Although Microsoft and Sony have revealed few details about their alliance, they did say they would collaborate on several fronts. Those include artificial intelligence and streamed consumer entertainment, but there were no additional information.

However, Piers Harding-Rolls, an analyst with IHS Markit, says the Microsoft-Sony agreement is less about collaboration and more about the nuts and bolts of business, including Sony outsourcing its sizable data center needs to Microsoft. The move frees Sony from having to worry about building costly data centers to handle the expected influx of gamers using its streaming service.

“This is, underneath, a relatively straightforward deal in that Sony has agreed to give some of its infrastructure business to Microsoft,” said Harding-Rolls.

Sony declined to comment for this story.

Last year, Microsoft gaming chief Phil Spencer told the audience at the E3 gaming conference that his company planned to push into game streaming. Its service, which is to begin a public test later this year, would work with Xbox, PC, and phones.

Meanwhile, Sony has said nothing about its plans.

Microsoft and Sony have been battling over the video game market for nearly two decades. Microsoft got started in 2001 when it debuted Xbox, challenging Sony’s existing console along with those of other competitors like Nintendo.

The latest partnership is even more surprising considering Microsoft and Sony are preparing for yet another battle with their next generation of consoles. Those are expected within the next two years, though no dates have been set.

Despite all the attention on game streaming, the technology, infrastructure, and public is not quite ready.

“We’re not going to have a wholesale transition to cloud-based gaming services at all. I think it’s a much slower transition than people perhaps are considering,” Harding-Rolls says.

Furthermore, Microsoft and Sony are facing an even greater threat: Google. Google’s announcement in March about introducing its own game streaming service, Stadia, upended the cloud gaming landscape. With its deep pockets and existing cloud infrastructure, Google could be a serious threat to legacy gaming companies.

Microsoft head of gaming Spencer’s response to the Google Stadia announcement was simple: Wait for E3, in June. Microsoft is expected to provide more information there about its game streaming plans.

In any case, the game-streaming market, like movie streaming, is expected to take years to develop. But companies must prepare early or risk being left behind.

“You can see that you have to start preparing now for what is to come in the future in five to 10 years,” Harding-Rolls says. “You need to be developing and positioning yourself strongly.”