PlayStation, Xbox, and the ‘network effect’ that fuels a console war

By Lee Brady,

As Xbox and PlayStation continue to butt heads over Microsoft's pending acquisition of Activision-Blizzard, the UK regulator overseeing the deal introduced a term that succinctly explains why PlayStation fears losing Call of Duty.

The UK Government's Competition and Markets Authority discussed the concept of a 'network effect' in its reasoning for referring Microsoft's pending Activision Blizzard acquisition to a second phase, and it helps shed a little light on why Sony's so afraid of Call of Duty becoming an Xbox exclusive. It also helps explain how the console war between PlayStation and Xbox feels so exclusive to outside competition, even after twenty years.

Xbox PlayStation Network EffectThe Network Effect in action.

UK Government lists 'network effect' as concern in Microsoft-Activision Blizzard merger

In its full reasoning for referring the Microsoft-Activision Blizzard acquisition to an additional phase of scrutiny, the UK Government described the 'network effect' in the games industry as this: "Consoles with a lot of gamers attract better content, which in turn attracts more gamers to that console, which in turn attract better content, and so on. This self-reinforcing mechanism makes it more difficult for new entrants without a large user base or good pre-existing gaming content to enter and grow in the market."

This is something many have perhaps always known about the games industry, but it's fascinating in this case because we're now seeing it being brought forward as a legitimate reason to potentially prevent one of the major games console makers from being able to — as CEO Satya Nadella put it in Microsoft's response to Sony regarding the merger, "have competition."

Perhaps not the exact competition he had in mind.Perhaps not the exact competition he had in mind.

While Sony's weak argument against Microsoft owning Call of Duty failed to persuade in Brazil, somewhere in that idea of a network effect it's suddenly much easier to see what Sony was so afraid of. It's not simply that Sony thinks Call of Duty is 'too big' for Microsoft — that's the weak argument we found particularly unconvincing — it's what the Call of Duty series might set in motion were it to go to Microsoft.

The reason PlayStation's CEO Jim Ryan called Microsoft's Call of Duty deal "inadequate" is not simply because Xbox's 'loaning' Call of Duty to PlayStation for a paltry three years unabated by exclusivity seems nakedly underwhelming, but also because the wider network effect that exclusivity brings would see many more game developers, indie and AAA alike, shifting course years in advance.

PS MicrosoftTwenty years — something about that seems bone-chilling.

By the next console generation, if such a thing ever exists in this increasingly online subscription service dominated industry, Microsoft having full ownership of Call of Duty would not simply trigger a wave of consumers to back the Xbox via said network effect, but also developers who would be looking to predict where the next biggest marketplace would go.

On the face of it, however, Microsoft is still right — in a follow-up statement to the UK regulators made to, it reiterated that PlayStation could still compete with such a network effect: "Sony is not vulnerable to a hypothetical foreclosure strategy, and the Referral Decision incorrectly relies on self-serving statements by Sony which significantly exaggerate the importance of Call of Duty to it and neglect to account for Sony's clear ability to competitively respond."

SwitchI mean, Nintendo hasn't hit the breadline yet, and this is what it's online service looks like.

It's a statement that purposefully targets Sony because, from this one angle, Microsoft continue to look like an underdog — and in this one light, they're right to do so. PlayStation's current install base dominates the console market with 150 million vs Xbox's 63.7 million, and it cites Sony's ability to weather a PS5 price increase as a fairly telling sign that Sony have little to fear as things stand — suggesting more competition is needed.

However, should the scope widen just a little beyond this view, we see that this is just more of the console war's "self-reinforcing mechanism," as the UK regulator put it, in action. While Sony's lofty position certainly should be scrutinised, as should Nintendo's comfortable second place, it's clear that the Activision-Blizzard acquisition and the network effect it could cause only continues to hurt the idea of actual competition within the console-dominated games industry — because what kind of industry-wide contest only involves three companies?

PS MicrosoftA transition phase.

While the UK regulator notes the games industry is in a "transition phase" thanks to "disruptive" streaming services and streaming technologies, Game Pass and PS Plus are already overshadowing any competitors in that side of the market too, even though players in many cases no longer even need a specific console to buy in. As frustrating a Wild West as the TV streaming market is, at least it's competitive on some broader level. Meanwhile, game production is so dependent on the network effect that it genuinely would pose a threat to not just PlayStation, but NVIDIA, EA, Ubisoft, Blacknut, and the rest, were a streaming service simply to be the home of Call of Duty.

PlayStation could weather that hit, but other competitors? The network effect would persistently wipe them out and set us up potentially indefinitely to endure the exact same console war we've been in for so long — and that seems frankly rather limiting when one thinks of the potential of video games as a medium. Let us know in the comments where you fall on this one, and whether instead of Call of Duty we should have focused this whole piece on Spyro and Crash dominating an Xbox-run, PlayStation-less world.
Lee Brady
Written by Lee Brady
Staff Writer Lee keeps one eye on the future (Marvel's Spider-Man 2, Final Fantasy 7 Rebirth), one eye on the past (PS Plus Premium, recent Sony news), and his secret third eye on the junk he really likes (Sonic Superstars, Final Fantasy 16). Then he uses his big mouth to blurt out long-winded opinions about video games.
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