Microsoft Corp, a laggard in the generational console battle with Sony, took a major step to position itself for the "metaverse" - a proposed immersive experience where people game, shop and socialise online - with a $69 billion deal for "Call of Duty" developer Activision Blizzard.
Sony's shares slumped 13% on Wednesday amid concern Activision titles would be pulled from PlayStation systems.
"They're basically trying to build a monster," said Serkan Toto, founder of the Kantan Games consultancy in Tokyo. "I don't think Microsoft is spending $70 billion to become a software provider for Sony platforms."
The full frontal approach contrasts with Sony, which has made incremental deals and gained praise for building a network of in-house gaming studios that have produced hits such as "Spider-Man" and "God of War." Analysts say it - and other giants - may now feel pressure to make more deals in response.
Microsoft's deal for Activision is made possible by its vast array of other businesses, including software and cloud services, with its market capitalization more than 14 times that of the Japanese conglomerate.
Many observers see Activision as a tarnished business after allegations of sexual harassment and misconduct by managers and with its major franchises losing momentum, analysts say.
The developer is "basically a semi distressed asset," said Mio Kato, an analyst at LightStream Research writing on the Smartkarma platform. "This backward-looking nature to Microsoft's strategy is what makes us sceptical about their ability to compete with PlayStation."
PRESSURE TO CONFORM
The deal will likely aid Microsoft's aggressive expansion of its Game Pass subscription service, which raises concerns Sony will be forced to follow suit. Offering games for a flat fee can eat into sales and erode margins.
"Most analysts have been napping during these developments, cheering Sony's stronger movies and music business to justify a higher rating," Amir Anvarzadeh, a market strategist at Asymmetric Advisors, wrote in a note.
Tech giants including Apple and Amazon have also advanced into gaming in recent years, but struggled to deliver hits.
Sony, by contrast, has a pipeline of hotly awaited titles including "Gran Turismo 7" and "Horizon Forbidden West". Microsoft has leaned heavily on the "Halo" series, whose latest instalment was delayed before release in December.
Advances to cloud technology are loosening ties to consoles amid expectation consumers will spend more time playing and shopping in virtual reality and attracting investment from firms like Facebook parent Meta.
The change has been compared to the epochal shift to electric and autonomous vehicles.
Sony, which plans to launch a next generation virtual reality headset, is also considering entering the electric car business to take advantage of its edge in areas including entertainment and chips.
On Wednesday shares in gaming firms including Square Enix and Capcom popped on speculation the Activision deal could lead to more consolidation.
Sony, a Japanese industry champion at a time when many local firms are losing ground to overseas rivals across a swathe of sectors, is seen as one potential buyer.
"Sony may come under pressure to do more M&A," Jefferies analyst Atul Goyal wrote in a note, adding that "if there are no regulatory bottlenecks, then Microsoft may go after another target in the not too distant future."
(Reporting by Sam Nussey. Editing by Gerry Doyle)
By Sam Nussey