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Microsoft Corporation (MSFT)’s Entertainment Segment Wins at E3

Microsoft Corporation (NASDAQ:MSFT) came back to the E3 conference with a strong lineup of games. The company is hoping to build on its strong track-record of growth in consumer electronics by investing time and effort into studios across the world in order to build exclusive content.

Microsoft Corporation (MSFT)

Microsoft Corporation (NASDAQ:MSFT) is building new in house gaming franchises like Ryse Son of Rome while at the same time, depending on bread and butter franchises for growth. The company plans to release another sequel to the Halo franchise, which should stimulate growth in the entertainment division in 2014. The company plans to launch the Xbox One in November 2013 with a $499 price tag for the United States.

Xbox One Impact on Growth

Currently, the entertainment segment is Microsoft Corporation (NASDAQ:MSFT)’s fastest growing segment. The company plans to sustain the growth of Xbox Live subscriptions by offering two free games per month to subscribers. This may help to put a floor underneath the digital demand for video games and give developers added incentive to create unique video games without worrying about the risk of not meeting the break-even point for game development.

The Xbox One has been able to attract some of the best video game sequels such as Forza Motor Sports 5, Electronic Arts Inc. (NASDAQ:EA)’ Battle Field 4, and Dead Rising 3. Activision Blizzard, Inc. (NASDAQ:ATVI) is also planning to release its next generation Call of Duty and Diablo 3 for the Xbox One.

The Xbox One also comes packed with recording capabilities. Xbox Upload Studio goes head to head with Sony’s recording and sharing software on the PlayStation network. Both Microsoft Corporation (NASDAQ:MSFT) and Sony are integrating features that help the consumer share video gaming content. Video gaming is starting to become a sport, and because of this, more advanced recording features are necessary in order to encourage gaming into becoming its own spectator-driven sport.

Console refresh hitting Activision Blizzard’s guidance

In anticipation of the console refresh, Activision Blizzard, Inc. (NASDAQ:ATVI) anticipates EPS guidance of $0.73 for the full-year (in 2012 the company earned $1.18 per share). The significant decline in earnings is driven by the rapid increase in research and development expenditures.

In the last console refresh cycle, Activision Blizzard, Inc. (NASDAQ:ATVI) was overly dependent on the World of WarCraft franchise, which eventually reported declines in both subscriber figures and net income because of competition in the massive multiplier online role playing game space. World of Warcraft players are starting to become fatigued by the gaming experience and are investing time into other video games.

The company anticipates that the operating expense margin is expected to increase from 40% to 49%. Operating expenses are going up in order to address the constraint in video game development for the console refresh.

Both Xbox Live and PlayStation Plus subscriptions give games to the subscriber’s collection every month. The collective bargaining power of the 56 million Xbox subscribers allows for this content redistribution. The subscription model is giving added incentive to game developers to develop games as it is easier to predict future buying patterns with a subscription distribution rather than a retail distribution. As a result, game developers are putting up the research and development dollars today in order to increase year-over-year earnings growth in future accounting periods.