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The Patent Strategy Podcast is a twice-monthly podcast where hosts Ian and Samar explore the patent tactics and portfolios of leading companies in tech, media, and beyond. Each episode breaks down a company's business strategy, analyzes their patent portfolios, and scores their patent strategy efforts. You'll gain valuable insights into the business landscape these companies operate within and learn how to effectively build a patent portfolio to support business objectives. Join us to deepen your understanding of patent and business strategy.
Hello and welcome to the Patent Strategy Scorecard podcast. I'm your host Summer Shaw, and with me is Ian Holloway. Ian, how are you? It's good to be here. It's good to talk about this one here and uh, yeah, it's been a good week so far. How about yourself? Yes. This one man, it was a tough one, I think from a analysis perspective, both on the business, uh, strategy side and the patent strategy side.
So we struggled a little bit with this one, huh? Yes, indeed. Um, there was a little bit of confusion, I think, on what exactly was the most interesting part of this, this whole situation. I think we've nailed it down. Yes. So today's episode is about Microsoft and more, particularly about its Xbox or gaming division.
We warned ourselves and our listeners about this on the first episode, we said that, Hey. Parsing the patent portfolios of large, giant multinational companies is very difficult. And that's why we started with smaller companies with one business model. And look what we've got ourselves into in episode number three.
We have one of the largest multinational corporations in the world. At least we've limited ourselves to the Xbox or the gaming division, which will help our analysis or it'll help us parse their portfolio a little bit. But the business strategy was also really challenging to parse here from our perspective, and that's why today we may take a slightly different pathway to the analysis.
I think. It is impossible to have any meaningful business strategy discussion about this without talking about the history of gaming first. So we're gonna take a walk down memory lane, hopefully for our listeners. I think that will help set the stage for understanding where Microsoft is today and how they ended up here, and why are they making some of the strategy choices that they're making today.
Yeah. With that, let's jump into the history of video gaming. Okay. To me, yeah. This sets the stage for the work culture in these different companies. Yeah, I think so. We won't go all the way back, although I would love to at some point because the history of video games is fascinating. It's so interesting how these things developed and came to be, and how some of these companies got started.
Usually there was some animosity between the founders and the CEOs, and they took lots of risks. We have a very large market that they have. Created, but Atari, Sega really started the market and kicked off the console market. I think eventually there was a big recession in the gaming industry. There was a big over investment in this space, a bubble, if you will.
You know, Sega and Atari kind of went away. Nintendo kind of steps in and cleans up, right? Like they become the dominant console provider in this space. That is all the way up until the mid to late nineties, which is when Sony comes about. Sony originally was hired by Nintendo to develop a a disc drive for their Super Nintendo console.
They were like, Hey, we've got this great way to store data, to run games. We can provide better music, better graphics, Nintendo, let 'em develop all that. And then when Sony was done. Nintendo said, yeah, we don't need it. We're gonna stick with cartridges. So instead of just walking away, Sony decided to say, alright, let's enter this market ourself.
Yeah, and Sony is very shrewd, I think, from a business strategy perspective. We talked about them in the Netflix episode, and I'm continually impressed whenever they decide to enter the market, they tend to do really well, and they tend to be very strategic about how they enter the market, and they have very clear value propositions that they exploit in this industry is no exception.
So what Sony figured out is that games are becoming more and more graphics intensive. Right? That is the big differentiator. Before that, you have the Mario Kart games and the Super Mario games. Those are not graphic intensive games. They're very lightweight games. And to this day, it surprises me, I. I have a Nintendo Switch, and when I download Mario Kart, it's one gig, or no, it's not even one gig.
It's surprisingly, it might even be like two, 300 megabytes large. And then when I download like the NBA 2K game, it's three gigabytes. So it's massive in comparison. And so I think historically, video games were not that graphics intensive. They were focused on gameplay and the user experience. But Sony figures out that, hey, developers were spending more and more time developing really complex graphics and you need to be able to store all this data.
And cartridges just didn't have enough storage and memory bandwidth CDs did, right? So they're able to store all this information and they're able to onboard developers onto their platform and say, Hey, you can provide a much better complex gaming environment, much more immersive gaming to your. Game players or to your users by using our system, and Sony really steps in and cleans up that marketplace.
I think they become the dominant player, right? By the time PlayStation One and PlayStation two comes out, to me, this seems like a level of control that both sides took a different path on. A Nintendo likes to maintain control, which means they make the cartridges that everybody has to develop their stuff on.
Whereas PlayStation allows those developers to work off of CDs, which they don't really control the production of CDs. You can make that yourself, and it's allowing third parties to come in and make your brand better. That's right. Yeah. Nintendo, so it's a double whammy, right? So one Sony just has a better product, right?
They can just offer a better game and a better, more immersive gameplay. Nintendo cannot offer that because they. One control, like you said, and they can control the cartridges 'cause they own the IP on the cartridge itself. Like they had all sorts of restrictions. If a game developer wanted to like sell more cartridges because they sold out, they would have to get Nintendo's permission first, which is insane.
And Nintendo would just withhold permission or just sit on that request for a while. It was just like a painful company to work with by all attempts. And they also took a big chunk in margin out of these games as well. So they said, Hey, if you want the privilege of being on our platform, you had to pay us all these royalties and all this.
Portions of your sales and all that stuff. So not only does Nintendo end up with a inferior product, so to speak, but they also are just more difficult to work with. And that's the one two punch, right? That allows mm-hmm No, to just really step in and take market share away from them. Nintendo goes from the top console provider with what is the original Super Nintendo to becoming like a very distant, what was it, the Nintendo Game Cube or something like that.
Uh, that would be the Nintendo 64 I think with PlayStation one. Yeah, that's right. So yeah, so they become very small percentage of the market. They niche down and they have, they start playing a slightly different game, right? 'cause they can't compete with Sony and PlayStation and these really graphics intensive games.
Alright, so let's get into when Microsoft is finally gonna enter this market then, right? Yeah. Microsoft. Has a another perspective on this thing, right? So they wanna just enter the market. They see this as a growing, lucrative hardware, software business. Microsoft famously is in the PC market and they're dominating there.
I don't know all the motivations for wanting to be in this marketplace to begin with, but they do have a strategy where they say, Hey, we're going to come in and we're gonna undercut Sony. So we are going to offer a lot of the same functionality. Maybe our resolution won't be as high. Maybe our rendering speed won't be as fast, but we are going to offer a cheaper alternative.
Right? And, and Microsoft really is able to take a lot of market share away from Sony, right? They become an equal footing, I think. And I think with the PS three generation, which would be what? Early, early to mid two thousands. That's correct. Yes. I think they come out with the Xbox One and really start taking a lot of market share away from Sony because they have, they offer basically the same thing, just slightly worse, but also quite a bit cheaper.
And that's a great way to take the bottom end of the market and develop that console business line for them. So they're able to just out value Sony at this point in time. That's right. So Microsoft's doing this simultaneously. Sony is going in the opposite direction. They come out with the PS three and they offer much better performance than Microsoft.
They include like a blue ray player and which is. Pretty expensive technology that they have to license. They really get their clock cleaned by Microsoft in this generation, right? The Xbox One, outsells PS three for the first time ever. And mostly it's because Microsoft's offering more or less the same thing, but at a much better price point, value proposition.
And Sony is going in the opposite direction. They're making things more and more complex, more and more expensive, and not enough of a value proposition to justify that expense. So Microsoft has a great strategy coming in at that lower price. They must maintain that strategy then, right? Since they've CL carved out that niche for themselves, you would think, right?
Hey, if it works, definitely don't keep doing it. That's right. And this is gonna be maybe a theme, and this is why we're going through this history here, and hopefully this is interesting to our listeners because it's also a good case study in how to lose momentum and give away your advantages. So you would think Microsoft's gonna be like, okay, this works.
We're always gonna undercut Sony by a hundred dollars. Right. Um, 'cause it works so well. But I think there are some market conditions that are changing. It also used to be, and maybe this is something we should have talked about in the Nintendo, Sony battles, but it was also very expensive to change platforms for game developers.
So if you were a game developer and you were developing a game for Sony, PlayStation one, for example, and you wanted it to also work on Nintendo 64, it was very difficult. You'd had to basically rewrite the code and maybe do a lot of enhancements on the graphics because they had very different performing graphics capabilities.
Mm-hmm. So it was like making a whole new game. At that point, the developers would only pick one console and say, Hey, we're either gonna be on N 64 or we're gonna be on PlayStation one. There wasn't a lot of cross compatibility, so you might pick a console based on what games are available. Okay. That's right.
And it wasn't an exclusive, as we think about it today, because exclusivity implies some contractual obligations, but there were no contractual restrictions like game developers. It just didn't make sense for them to develop for two different consoles 'cause it's, it'd be like developing two times as many games.
And that's not something they wanted to do. They were much rather focused on one and then be successful there than to do it for two different things, especially as the Nintendo market share was shrinking. It wouldn't make any sense to develop a whole new game for a much smaller audience. So that's the backdrop here.
You have these game engines that come online like the Unreal Engine, which make it easier to port games from one console to the other. So by the time you get to the PlayStation three, PS four and Xbox One Generation, almost all the games are on both. Platforms, right? Because it, you just, you have to do some coding, but it wasn't a huge amount of coding.
It's not making a whole new game at this point. Small investment for pretty big payoff, assuming you're reaching out to the other half of the video gaming consumer base. Exactly right. So it, yeah, the market is growing and also because Xbox has taken such a big chunk of the market, it makes all the sense economic sense to do the porting, even if it's painful as you need to reach the other half of the gaming market at this point.
So these are the changing environments, right? By the time the PlayStation three battle versus Xbox One Battle is finished, I think Sony smartly recognizes that, and they just got their clock clean with the PS three. So they're like, okay, what do we do now? Because we won against Nintendo by offering just a bigger library of games, but that's not gonna work against Xbox, right?
All the games are on both of our libraries, so that's not a way. And then we also tried to just offer better graphics performance, game performance that didn't work either, because our PS three was way better than Xbox One. So what do we do? And so I think they come up with a couple of different things.
One is they start buying gaming studios, and they buy little gaming studios in the, uh, niche gaming studios to, and make those games exclusive to PlayStation. Okay? So they weren't big drivers, like nobody would, they weren't like Madden or like Call of Duty or Giant Games. It's not gonna be the number one decision for you to buy a console.
But if you had like top five games, maybe one of the top five were gonna be only on Sony. So you'd be incentivized to purchase a Sony console as opposed to a Xbox console. They're making small bets. We're hoping for a big payoff in it, but if they lose, it's not a big loss to them. Makes sense to me. Yeah.
And it is in many ways, like revenue destructive, right? Mm-hmm. Because if you are a game developer, and this is also part of the kind of the changing market conditions discussion, is that if you are a game developer, your incentive is to get that game in front of as many game players as possible, or users as possible.
This is the same thing we talk about with Spotify and Netflix, is that there is a huge amount of fixed costs with making the game, and then there is the marginal cost of distributing the game is zero, right? So you want to distribute as much as possible and generate as much revenue on that game. So that's where Sony says, okay, we're gonna take a hit on for going this revenue.
I'm making the game exclusive, but our hope is to make up that revenue by selling more PlayStation games, and they also lower the price of their, the PS four, they don't include the expensive Blu-ray technology. They don't have the latest, greatest chips on those PS fours. They reduce the cost of that console quite a bit.
They say they really cut their margin, at least in the early stages of the PS four generation. Mm-hmm. They also said, Hey, we're going to make up some of that loss margin, or we're gonna sell the console at cost, essentially, but we're gonna make up that revenue in the software sales. One of the things, I don't know how well known this is, but gaming companies like PlayStation and Xbox will take 30% of revenue from the sale of Madden.
Right. That's a licensing fee. So if Madden wants to be on PlayStation, Madden. Pay 30% of their revenues to the console maker for the privilege of being on the console. So Sony said, Hey, we're gonna lose some margin on the actual sale of the console, but we'll make that up in our software. So they have a two-pronged strategy.
One is to, and both of these strategies are not without risk, right? You're incurring losses in both of these things. This is pretty amazing and prescient of Sony to do this. Hey, we're gonna buy these in Indeed developers, and we're going to make them exclusive and we're gonna lose revenue upfront for doing that.
Mm-hmm. And then we're gonna sell our consoles at cost and we're gonna lose revenue from doing that as well. And the hope is that we'll make it up on the backend. So would you say Sony's kind of more long-term focused? They're not looking at short-term gains, but it's just a long-term successiveness market?
Yeah, and I think they also just read the market properly, right? They understood that, hey, differentiating on the basis of these blockbuster games is not gonna be enough. Like what worked in the Nintendo battle is not gonna work in the Xbox battle. And they also started to understand the unit economics of the publishers as well.
So I think they got it. And they also understood what the audience wanted. Like they, the audience wanted, not the most performant like mm-hmm Best gaming experience. They wanted something good enough, but at a slightly lower cost point. So they read the market really well. I think Pause goes to Sony. So what's Microsoft doing during this time?
Yeah. Microsoft, as you said, instead of pressing their advantage and doing what worked to gain even more market share and become even more dominant, they go in the opposite direction. And in fact, during the PS three battle and the Xbox One battle, everybody was like really waiting for the next Microsoft and Sony consoles, and everybody anticipated that, Hey, when Microsoft comes out with their next one, they are going to be the dominant console player in the industry.
Instead of doing that, they went in a slightly different direction, maybe in a completely opposite direction. Okay. They said that, Hey, we have this platform. It's basically a PC in the living room, and we are going to make that the centerpiece of our console strategy. So they had this big theory that, hey, every household is going to have a pc, and then they're also gonna have a PC in the living room, which is our console.
So they made the next generation of Xbox, I think it's called Xbox one, one s, and one X. So they had three different ones. They said that, Hey, this is gonna be your streaming device for your television. You can like, uh, you know, browse the internet with it. You could do everything that you do on a pc, but in your living room.
So we're gonna make it really friendly and usable for that. And then we're also going to add new gameplay to it, which is the connect system, which are these like hand um, motion control type stuff. And both of these things added significant costs to their consoles. So now in the next generation, PS four is the cheaper console, and Microsoft Console is a hundred dollars more.
Can you think of why they would want to make this kind of change to switch strategy right there at this generation? This is why I think. I still don't know why Microsoft got into the Xbox business to begin with, right? Mm-hmm. Maybe this was their vision is that, hey, we think PC sales are stagnating, right?
We think everybody who's gonna buy a computer has bought a computer, but we think that we need to expand this use case some more. And maybe our pathway into another PC use case is video games, right? So maybe this was part of their big plan all along, or may maybe they just wanna go a different direction.
'cause act actually, it didn't go into, the PC didn't go into the living room, it went into your pockets, right? Actual PC was the iPhone or the mobile computing device. So they, I think they just maybe misunderstood the market or maybe they just were like. So convinced that everybody's gonna have a PC in their living room that like this was very obvious to them.
I don't, I'm not really sure. So we've got all these mobile phones. Now of course, people know of all these addictive games on them, right? This is about the time they're entering the market then as well. Yeah, I think so. In this generation, the PS four, Xbox One, Sony just completely cleans Microsoft's clock, right?
Very limited sales for, I think for the Xbox. The original Xbox that went up against PS three, I think Microsoft sold something like 84 million units. And then for the Xbox One generation, they sold 25 million units. Right? That is, you weren't kidding when you said they got their clock cleaned. Oh my God.
Yes, that's right. It got demolished by it. Sony, I don't know why they went this direction. If this was part of their big plan all along, if they just misread the market, maybe they thought. People want this thing and want a PC in their living room, they want their TVs to be connected. Um, so I think they missed on that and they missed on the bigger philosophical change that was coming, which was that PCs were not going in the living room, they were going in your pocket, which also makes sense given how they lost to Apple in, in around the same timeframe.
And I know we don't talk too much about Nintendo for the rest of this. What are they doing during this era here? Yeah. Nintendo is on its own, right? They have figured they can't compete with Sony on the graphics performance because how tightly controlled they are, and they just didn't want to lose that control.
And even if it came at their own detriment, right? They're just like a diff they have interesting culture, let's say. Yeah, it seems to work for them. They're not trying to be the dominant force anymore. The, our two players from here on out are pretty much Microsoft and Sony. Yeah, I think Nintendo's philosophy is that we're going to make money on everything, right?
Xbox and PlayStation famously don't make any money when they first come out, right? Because they're buying really high end chips. And then two or three years later, those chips become very cheap, right? And they make a bunch of money on the later end console sales. So they forego near term revenue for the long-term revenue potential.
Nintendo doesn't do that. There's something in their culture that prevents them from being like, oh, we're gonna forego revenue today. They just never wanna forego any revenue, even if it limits their market potential. They make a lot of money. They're like incredibly profitable relative to Sony and Xbox, but they just have a much smaller market at this point.
Um, they can't compete on performance, but they can compete on user experience. And it is interesting, which is maybe also smart on Nintendo's part. Maybe they realize that, hey, we don't wanna give up this control. But maybe we can create something that people will buy our console in addition to a PlayStation, which is actually my experience as well.
Most households, they pick either Xbox or PlayStation. Nobody's gonna have both. Mm-hmm. But then they also have an Nintendo. They've got their own little side. Yeah. But I don't know if many households growing up that had both an Xbox and a PlayStation. That would be, that's unheard of at in my circles growing up.
Oh, same here. Same here. Um, okay. So yeah, so the market is diversifying quite a bit. Mm-hmm. Uh, so we have Sony that is doing high performance gaming. They are mass market. We have Nintendo, which is niche market. Low performance gaming. And then we also have, with the advent of mobile phones and Facebook and Apple mobile games that are also coming in at the very bottom of the market, which are like the Candy Crush and Farmville games a low investment opportunity, I guess, for, yeah, and they're like, usually they start off as $0 investments for the users.
Gamers would spend 20, 30, 40, $50 on a game, on a cd, but most casual gamers weren't gonna spend that kind of money on a game. But they would play something if it was free, or if you can buy it for a dollar or $5 or $10, whatever it may be. That part of the market really becomes unavailable to all three console makers.
Right. That goes to really Facebook and Apple who are promoting and launching these type of, mm-hmm. Making these products available. Sure. Okay. So everybody's picked their niche, carved their niche. At this point, Microsoft got its clock cleaned. We're in the, in what, 10, 2010s, 2020s. Now we're moving up to present day closer and closer.
So Microsoft is the one left without a dancing partner at this point, right? Mm-hmm. They, they're rudderless, I think. They're like, okay, where do we go? Do we go high end? Do we go low end? How can we carve out our niche? And the other thing that's happening here is that the gaming industry as a whole was just growing by leaps and bounds, but it has stopped growing at this point, right?
I think the market has stagnated a little bit, and not nearly as fast these days, right? Yeah. Yeah, that's right. So Microsoft is like, what do we do? And I think when you're rudderless like this, it makes sense to try out a bunch of things and see what works and see where you can carve out a niche and find a really profitable and high margin business and a high velocity business.
So I think Microsoft starts taking some bets. Okay, so they start acquiring studios like Sony. So they're making little bets like Sony was. Yeah, you would think. But no, they go big. They buy, they buy Activision Blizzard, the makers of a Call of Duty franchise for about $80 billion. They buy Zenax or Bethesda, the makers of Fallout for many billions of dollars.
They buy Minecraft for, was it $8 billion or something like that. So yeah, they're not tiny bets. They are giant, epic proportions bets. So these have to pay off bake for Microsoft to succeed in this day and age. Right? Like why would you spend $80 billion on a gaming studio? Yeah. Very curious. So Sony bought these studios, these like indies franchises and indie studios.
Mm-hmm. And made them exclusive to Sony. So a lot of people in, actually our kinda regulators were concerned that Xbox was gonna buy these studios and make them exclusive to Xbox as well, but they don't. And actually in reality, they can't because of the unit economics of this thing. So if you have Call of Duty that you bought for $80 billion mm-hmm.
And you say, Hey, I'm only gonna make it exclusive to Xbox, which is maybe 30% of the market. Mm-hmm. Then you would chop off the value of Call of Duty by about 60%, 70%. And that's a big write off for Microsoft. It's an un undoable amount of money. You can't make that choice. Yes. That's not gonna happen because these acquisitions are so big, they can't make them exclusive.
That's not gonna work. But they buy them anyways. I don't know what opportunity they saw, but they're like, maybe they saw that in this world, all the profits accrue to gaming studios and not the console makers. So maybe that's part of the reasoning here. Instead of competing, like if you were to take the analogy to PC makers, right?
If you were a Dell or an HP. You're a low margin business at that point. What is high margin is the Windows software. Right. So we are going to take most of the profit margins in this ecosystem and we, these games are like Windows and then the actual consoles are more like HP and Dell. Okay. You know, utilities in a sense.
So maybe they saw that as an opportunity. They also famously bought Activision at a very low valuation. They bought 'em at their, when they were going through some legal troubles. Right. They had a few problems with their leadership there, didn't they? Some bad press and just in general mismanagement.
That's right. There were all these sexual. Harassment allegations against the CEO. The CEO had stepped down, the stock price had taken a huge hit and mm-hmm. I think it was an opportunistic buy for Microsoft. They were like, Hey, this thing is usually worth a hundred billion dollars, but we can get it for 80.
Like it's a good deal. Yeah, we buy it. But just because it was a good deal doesn't mean it was a very strategic buy, which I'm sure we'll get into more and more as we go. But yeah, this, maybe that's the thought process is that, hey, all the value is accruing to the gaming studios, so let's be there. 'cause that's like the high margin business maybe.
Okay. Okay, that's fair. Which kind of makes sense. Like that to me is a reasonable thought process and a reasonable strategic decision. But that strategic decision doesn't make a lot of sense when you look at their subsequent strategic decisions. So to me, I was like, okay, maybe Microsoft is just moving in a different direction.
Xbox is not gonna be a thing. They will sell off maybe their console business to somebody else, and then they'll just become a game publisher. 'cause that's where the value accrues in this marketplace or this VA value chain. Sure. But then Microsoft does something really weird. They launch the Xbox Game Pass and the whole, maybe we should talk about what this game pass is, but basically it's a, yeah, yeah.
Go ahead Ian. We've got a streaming service here that Xbox can offer. Or Microsoft can offer to their Xbox console. You get a game pass, you pay a monthly subscription, and you're entitled to a series of games. And in addition, you can get the same game pass to work on your PC as well. But I think it's restricted just to the Xbox and pc, right?
That's right. I think when they launched, it was exclusive to Xbox. The whole purpose of the game Pass was, Hey, this is gonna help us sell more consoles. So that to me, signals that we're very much in the console business. Instead of selling off our console division, we're doubling down.
So they launched this game Pass, and then it becomes much more clear that, okay, they bought Activision and Blizzard, not because of. They want to be a gaming publisher now. Mm-hmm. But because they want to force Activision and Blizzard to be on the game pass and they want them to be on the game pass because they wanna sell more consoles.
So that's maybe the logical thread here, which really doesn't make any sense to me at this point. Why wouldn't Activision and Blizzard wanna be on the game Pass normally? If Microsoft hadn't bought them, wouldn't they still wanna be on this game pass or not? Not at all because it, Activision is selling Call of Duty for $80 a disc.
Right? If they are on the Game pass, game Pass is what, $9 a month or $12 a month, something like that. They're getting a percentage of that site. So instead of getting $80 upfront from a customer, they would get $4 a month from a customer and that customer would have to pay, play Call of Duty for what, uh, three years or something like that for them to make up the revenue.
Which is not gonna happen, right? No, no, no way. These games are addictive, but they're not that addictive.
Yeah. So they launched this game pass and they're like, oh, it's gonna help us sell more consoles. But in order to sell more consoles, they have to have a bunch of games on Game Pass. And most game publishers are like, no, we don't wanna be on the game pass. That's you. Not a great value proposition for us.
We're not gonna go from $80 a game to a few dollars a month. Yeah. So I think they buy these gaming studios to get them on the game pass. And like in, in theoretical, it's like a virtuous cycle. They all feed into each other and eventually everybody makes more money. And also they expand the gaming market.
Right. So maybe they get some of these casual gamers who are not willing to pay $80 for a game. Mm-hmm. Which would be me, by the way. There's no way I'm buying a game for $80. But I may play something for a couple hours a month if it was $10 a month. Right. So maybe that's the idea there is that hey, like all of these will feed into each other.
We'll greatly expand the market of gamers out there. We'll grow the pie and then we'll make more money that way. But none of it really works. No. So instead of being like a virtuous cycle, it just becomes, like you said, total whipsawing or at odds at each other. The studios require a horizontal distribution model, like the Netflix and Spotify models that we talked about.
They wanna sell to as many people as possible for as high a price as possible. 'cause you have a huge upfront investment. Then the distribution costs are basically zero. Consoles are the exact opposite, right? You want to sell as many as possible and you want to have as many exclusive as possibles to drive that sales decision.
'cause otherwise you're competing on price. And then you are already selling these at cost in the first couple of years of the game console. Mm-hmm. So if you want to go even lower, you would lose money, which is a tough place to be. And then the game pass itself is value destructive to large studios.
'cause it, it costs a huge amount of money, these gaming studios to make these games. They're almost like Hollywood studios at this point, right? They, it takes millions and billions of dollars to make a game, and then they sell it for an expensive price and they make it up that way. It's not like a indie gaming model where you spend a few hundred thousand dollars making a game and then you can survive off of, make a great business out of $2 a month or something like that.
It doesn't work that way. Oh, so we're all over the place here with Microsoft, right? Yeah. Yeah. It is tough. It's a beautiful theoretical model, right? That all these things are gonna feed into themselves and we're gonna grow the market and we're gonna just dominate and crush it. But I don't think it reconciles with the economic reality of all these various business lines and models, because these gaming studios they acquired are so expensive.
Mm-hmm. That Microsoft is overweight there. And that's maybe the real problem is that because they're so overweight on these gaming studios, Microsoft is essentially a gaming studio. Now they can't. So Stony because they acquired these niche gaming studios and made them exclusive, like that's value destructive as well.
There's no doubt about it. Instead of being on a hundred percent of the consoles, they're on 60% of the console or 70% of the consoles. So they are foregoing all this revenue by making them exclusive. It's so much easier to forego revenue that you don't have, right? When you acquire a company for X amount of dollars and then you say, okay, we're gonna forego X plus 10, right?
We're gonna make that up later, but it's so much harder to say, Hey, I bought a company for X amount of dollars, but now I'm going, this company is gonna be worth X minus 50. Even though the math might be the same, the human component of it is, it's a write off, is a big difference. When you forego revenue, you just don't hire people.
Right? But when you chop off the value of a company, you have to like fire half of the workforce, which is like a really difficult thing for executives to do. And because they're so expensive, you're not gonna write off $30 billion, $40 billion. That would be a huge hit even for a company like Microsoft.
So basically they are a gaming studio at this point because they're so overweight on this front. Okay. And they cannot make economic choices that are long term focused and forego revenue in the short term because that would be such a big hit. Now they have to do what a gaming studio would have to do.
So they cannot, cannot, they're kinda hamstrung by this model that they're in, and they have to do all the same things that a gaming studio would do, even if in the long run it may be they, Microsoft is worse off. It's really hard to make these choices. Now, business strategy moving forward is, we're gonna be a game studio, or is that the choice you would make?
At this point. Yeah. I don't know. I think you would have to probably write off one of these markets or just because they're at odds with each other. Mm-hmm. And you cannot downsize any one of them to make the other one work in. You cannot downsize one in the short term to make the whole thing work in the long term.
Too much of a loss of value too va, too value destructive. So probably it makes sense to write off something. The gaming studios, I would not write off. That's just way too expensive. Yeah. Just even for Microsoft, huge investment there. Yeah. That that's untenable to lose a hundred billion dollars or something like that.
Mm-hmm. To be clear, they wouldn't lose that much, but it's still huge. Maybe the console market, I would maybe write that off and say, okay, what we are going to be is the gaming studio of of the video game market as well as. Maybe the software layer. If we can get game pass off the ground and get a bunch of games on there, we could be the software layer, right?
Windows for all these console makers who are PC makers. Maybe you can do it that way. Okay. But it's tough because Sony has cornered the market. So unlike Lenovo and I, BM and HP and Dell, who all had to essentially be commoditized because they were fighting, there were so many players that they had to compete on price for the most part, Sony doesn't have to do that, right?
Like they are the dominant player and they don't have to compete with anyone on price. Microsoft sells the console business. So maybe the software layer is untenable for them as well. They would just get squeezed out by Sony at that point, right? Yeah. Yeah. So Sony would say, yeah, no, thank you for your software, but we're gonna make our own software.
Something like that. Mm-hmm. It's a tough spot to be in. Something's gonna have to be written off probably. And I would say do it soon. Like it almost doesn't matter what it is. Like we don't have enough insight into these companies to, to make that call. But I would write that off and move on and just really focus in on what's profitable and what makes sense.
Okay. But instead they're just pursuing all of these business lines simultaneously and they're really limiting their potential on all fronts as opposed to picking a potential and then trying to win on that potential. Tough you, yeah. So that's, yeah, and that's why we went through all this history. 'cause it's interesting to get to this point here.
I think if you're up for it, we'll talk about what we would be doing if we got these, this kind of business model from the higher ups where we're pursuing everything. What would we be filing at this point? One thing. I would be doing if I was their patent counsel is, let's think long and hard about what we're gonna write off, most likely, right?
Mm-hmm. Um, because the writings on the wall, at least to me, that, hey, what is the most likely thing that we're gonna write off or maybe sell? And then how can we build a strategic portfolio around that so that when we do sell, we're selling from a position of strength as opposed to just writing the business off, right?
Getting pennies on the dollars. So I would get strategic about one of these lines of businesses and, um, make that strategic, and then I would pick the one that we're gonna compete on or battle on and win on most likely, and really make that portfolio robust. But outside of that, I guess if my mandate from Microsoft was, Hey, help us protect all of these business lines, then yeah, I guess I would.
For the console market, we would wanna file patents on graphics, ray tracing, that kind of thing. Anything that makes the console more performant. If say, if you were gonna do a gaming studio side, what would you do for that then? Yeah, good question. So I would do the graphics then rendering the 3D modeling ai, right?
Anything that will make the display of my game much more visually appealing and immersive and that kind of thing. If I'm trying to protect the game pass division, I'm filing a lot of patents on the streaming technology, the multiplayer aspect, the anything to make that easier, more appealing to a user.
Right. So you could stream across multiple platforms, multiple devices, things like that. That's right. We have the ar, vr, xr, gaming consoles as well. Um, Microsoft famously acquired HoloLens, although that was more for like corporate. Use cases, you, you could see a world where that becomes a dominant console platform.
Yeah. You could have a lot of overlap between the IP that you file for corporate situations and home in home entertainment there. Sure. That's right. Yeah. And Meta is really cornering that market too, right? They're just like, if you want to play ar vr video games, you're buying a meta quest. Uh, you also have the apple, what is it called, the Apple display, or No, it had the, I don't know what.
Oh, it's gotta have a catchier name than that, if it's gonna be Apple, right? That's right. They have their headset, which is a great environment for ar, vr games. So maybe that's like another area of gaming that. Microsoft could pursue and become dominant in. Mm-hmm. But yeah, it seems like they just, they've been laying off people on the HoloLens divisions for years now, and I think just a couple of weeks ago they announced that they're gonna close that division down.
HoloLens no longer exists. So strategy wise, we're not looking towards that properly at this point. Although it'd be interesting just to capture a new market in that regard. I see a lot of new patents on augmented reality goggles and, and displays. But yeah, I don't understand that. 'cause there's a bunch of filings about that while simultaneously the HoloLens division is getting shut down.
Shut. Oh. So yeah. So with this going forward, we did take a look at what Microsoft was actually patenting, what strategy they're actually pursuing based on the IP that we could see. Ian, why don't you walk us through what Microsoft is in fact doing, and then we can jump into some of the patent strategy questions.
Sure. So from what we saw, there really seemed to be focused on consoles in general, as some alluded to earlier. This one was a little bit of a difficult nut to crack, if you will, trying to find the exact searches to, to filter out overlapping patents and things like that. So keep that in mind that there's probably a little bit of overlap where something falls under the console area when actually maybe it's a little bit more gaming studio related, potentially.
But what we found is most of their investments about half are in console development. So we are looking at just video games in general. We're looking at their controller design, their networking design for it, things like that. And so we're looking at that and about 20%. Would say go towards being a gaming studio.
Activision, of course, had a good amount of IP within this area, along with, I think we found the Candy Crush people as well mixed into this. So still part under the Microsoft umbrella, they're getting IP through acquisitions as well. So Candy Crush is owned by Microsoft, is that right? They like buying things, right.
A new thing. So yeah, about 20% dedicated being in gaming studio. You talked a little bit about the HoloLens. There're looking about 6% total towards those optical systems, which kinda leaves not much behind for the game pass at this point. And a lot of that, the UI stuff came from their acquisition of Activision here.
So they're hitting a little bit of everything, but they seem to still wanna be a console. Company. Yeah. This is backwards looking, right? Mm-hmm. We don't get a really good forward looking view, just looking at the patent data, but 50% of their portfolio is about consoles and that's the one I would write off or write down at some point.
Microsoft and I are at odds here. They are a company that likes to put a lot of investment in whatever they're doing. It seems like we did a comparison against Sony and Nintendo just to see what those companies were doing. We also included Tencent, which is a games they manufacture the Unreal Engine, which is used to make games, so they're more of a gaming studio.
And unsurprisingly, we saw stuff related to two thirds of their budget is related to it being a gaming studio. A Unity, which is also another game engine did about similar. As far as the one interesting strategy piece here is that I was thinking about this, if I was Microsoft, what would I have done differently?
Right? Like they really lost this PS four battle and at that point maybe they should have been like, Hey, this is not a great business to be in. Let's just, let's sell and focus on something else. Which they started doing by acquiring all these studios, which I think was misguided because these studios were so expensive that Microsoft became a studio.
Like I was thinking about this. If I were Microsoft, what kind of business do I like to be in? Which is a software business, right? That's what the software, software, we talked about, all the advantages. It is zero marginal costs to sell and distribute. Maybe I should, I would've purchased Unity, or I would've purchased Unreal, another engine to be a publisher.
Or you support all these publishers where you are a layer in between all these different console makers, and that's a great place to be because more and more these companies are going to try to get more share in this marketplace, right? Because it's so expensive to make these games now that you would be more and more willing to allocate budgets to reporting from one console to the other.
Maybe that's a direction that Microsoft could have. Instead of buying gaming studios, they could have purchased these things and then gone that game pass route. Then maybe they would've said, Hey, we made this so easy. All you had to do is push a button and you're on game pass. And like maybe they could have attracted more games onto the game pass business that way.
If I were to do things easy to be a Monday morning quarterback, that's one potential place they could have gone, I think to really get their game pass model off the ground. To me it feels like a more unified strategy too. One, clearly we talked about how ideally in an ideal world, their strategy of acquiring was going to feed into the game pass, but really this feels fear that that software publisher, that's the way to go.
Sorry to interrupt Ian, but Yeah, so I'd say one of the other big highlights of this is that as far as streaming services go, Microsoft's investing about twice as much as a percentage than Nintendo and Sony. So they're definitely focused on that. Overall, but when you look at total number of filings, Sony's filing about 50% more patents than than Microsoft is.
So they're much more aggressive in this environment than I'd say Microsoft overall. Uh, which is fine, just a different kind of strategy. There's a little bit more of the four strategies that we talked about that made up almost 90% of Microsoft's total IP that we saw filed in this environment. And uh, for Sony and Nintendo, it was about 60%.
So they're able to put their money into other maybe tangentially related items, whereas Microsoft is really heavily invested in these four strategies. So over time, I think what we saw when Microsoft was in that Connect era starting out, they slowly invested or filed in the. Video gaming sector, those kind of key technologies and really ramped it up around the time that the connect and all that, that home computer in your living room era.
And then what we've seen is a kind of a drop off after that in, uh, in the late 2010s era. Summer litigation wise, Microsoft has been a lot more involved and this is, remember restricted to their video gaming divisions. A lot more involved than our last two. Netflix and Spotify. We've got 13 total cases with 11 patents involved here.
Where does it or is it mixed? Yeah. So maybe I'll circle back to the answer here in a second, but one of my pet theories is that when a market is growing, like the Spotify and the Netflix markets are growing significantly, there's very little litigation usually, right? Everybody's focusing on getting a, a bigger piece of a bigger pie.
Mm-hmm. But when the market starts shrinking, it usually prompts some consolidation and it prompts litigation because now instead of everyone focusing on growing the pie, everybody's focusing on getting a bigger percentage of a shrinking pie. So maybe it's an indication of how the market is growing or not growing.
And maybe it's an indication of how well does Microsoft deploy these assets, because these are assets. If you think about it, you have what, 25,000 families, is that right, Ian? Which is like how many patents? Probably? Oh gosh, yeah. It's almost, I think it was 2,500 families. Oh, 25 or 27. Yeah, 25. But we're looking at, and this is just video gaming.
Yeah. We're looking at 10,000 some more. 10,000 patents, right? Yeah. Yeah. And out of those, only four or five of them have been involved in litigation. So like to me, it's some kind of an indicator of like how readily deployable this asset is. Like a huge value here is defensive, right? We talk about that, or maybe we should talk about that at some point.
But for most of these big companies, the value of the patent portfolio is defensive, right? It's a mutually assured destruction theory that, Hey, if you sue me, we'll sue you, and it will be hugely unprofitable for everyone. So yeah, let's have a deante. If you are going to assert patents, I wanna see what the quality of your patents are and how readily are you winning on those cases and that kind of thing.
'cause to me that's an indication of strength and value as well. Most of these patent cases were, they were, you know, when they were defendants, they were patent trolls, right? So they were mm-hmm. Just like patent assertion companies, they don't make any products, but they, their business is to sue people on the patents.
The ones where they were plaintiffs were just ancillary, right. One of 'em was like related to connecting peripheral devices, like controllers to a console wirelessly, or using a wheel type of a format to navigate a ui. So none that were like core to the technology or anything like that, but yeah, those are the patents.
I don't think they gave me an indication of a position of strength or, Hey, this is a killer patent that like we can. Extract value outta the marketplace with, they were just kind of small ancillary litigations. I think that's what we've seen just within the industry here as a whole. These patents are, it's hard to get too much differentiation between what you're doing over a competitor at times with what you're finding.
I think there is differentiation is maybe there's less of a willingness to assert these patents and which makes sense if this was, this has been a historically growing industry and why would you wanna enter into litigation and hurt everyone's profit margins? But this is something to keep watching as the industry moves forward and potentially shrinks, or at least stagnates.
So you would expect perhaps some more litigation in the future, maybe in the medium term future as companies realize that, hey, we're not growing, so we gotta find revenue somewhere else. So we look. We'll move on to some filing trends. We touched on this earlier where huge investment in the 2010s, but we're seeing a drop off here as we enter the 2020s.
Microsoft filing about 150 patents a year on average, and getting about a 70% issuance rate. So not too bad. Very comparable to what Sony does. Although Sony's trajectory is very much accelerating here. Sony, you could draw pretty much, you could curve it a pretty good straight line moving up on Sony. As far as their filings go, they're up to about 400, almost in 2022 that we know about, and their issuance rate is in about the 75% range.
The interesting one, I thought about this when we were doing the competitor analysis, was Nintendo. They seem. Kind of risk averse or they just file on stuff that they know that they can get issued or they are very thorough in their prosecution of their patents. They're making sure that they're getting them because they only file about, on average, 60 a year, but their issuance rate is 95% summer.
That is incredible. For a big company, filing that many patents, having that high of an issuance rate is remarkable. Really kudos to them and their lawyers. They've done a really good job here. Yeah. I also, what might be a product of that too is they are filing more foreign patents as opposed to in the us whereas Microsoft is mostly in the US and they're filing a lot of hardware patents.
Like when I was looking through them, they were about the switch and the physical aspects and that kind of controllers and stuff like that. Easier to get patents on those things. Makes sense, but also an indication of innovation, right? Like there are real innovations here relative to their industry peers.
Yeah. No kudos to them. Yeah. Look at Tencent as well. Really just, they're making a hockey stick of a graph for filings starting in about 2015. They have 18 patents filed up to 730 in 2020, so very short time filing very aggressively, and no surprising, they're, they're about a 70% issuance rate as well.
These are gonna be mostly filed in China as well. Very aggressive and poor unity here at the end. They are, are small fish in a big pond. They're filing less than 10 a year and bouncing all over the place with their issuance rate geographically, unsurprisingly. Microsoft for their video games are filing in the United States, 40% of their patents there.
And the next three we're looking at the EPO, China, Japan, Korea, as their next big focus areas. I, I don't think that's a big surprise here. I think that's a fair distribution, probably. I imagine that the bigger markets are the United States, so maybe I would be more overweight in the US filings, but I don't have any real problems with this approach here.
Key technologies, we touched on it earlier, it is mostly video game space. That's what our 50% or more is directed towards, and we saw very similar filings with what we looked at earlier here. So I think we're ready to get to the scorecard if you're up for it, unless you had any other thoughts on their IP here.
Summer? No. Yeah, I think we can get into our grades. I have some more things that we can cover, but I think we can do it in the context of the metric here. So my first question to you, as it is with all our scorecards, is does it cover the base tech? Yeah, I think so. We give them a b plus. They do a really good job of covering the consoles, the technology presented.
I said they're very involved in that for sure. Definitely. Yeah. Their allowance rates not quite where you want it to be, but still I think they've done a good job. They've done a good job of capturing IP around their gaming studio, right? How to render this content, make it more immersive, leverage ai, although those are mostly Activision patents that we saw.
I think Activision done a really good job and Microsoft mm-hmm. Is the beneficiary of that, but we gave them a b plus. I think they're game pass. That seems like a big focus for the company moving forward and very under invested in that space. Um. Mm-hmm. Not a ton of filings there. Maybe you give them a small pass because they don't have a lot of competition.
Although historically they did. They had the Google Stadia. Netflix is entering into this mobile gaming space as well. So there's competition there. But yeah, they're under invested in that space and that portfolio. And then especially if it's gonna be a big focus here moving forward. So, and that's right, that's what they've stated in their investor calls and materials.
And then ar vr, I would've thought they would invest pretty heavily in there, given HoloLens, but it maybe that's not a big point of emphasis for them anymore. And this is still delayed data, right? It's still backwards looking. Potentially, they could have had a big shift. Who knows. Right. If you were going to, to me, the most natural pace place for Game Pass is to really corner the ar vr gaming market.
Right? If you were able to make a compelling Game Pass product and say, Hey, here's our Game Pass app, you can play it on your computer, on your pc, you can play it on your Xbox, you can play it on your Nintendo, you can play it on your Sony PlayStation, you can play it on your Meta Quest headset. To me, like that might have been the way to go, right?
Like now you are the software layer for all these different ways of consuming gaming media. Mm-hmm. And to me, like the Game Pass and the ar vr are natural compliments to each other as opposed to being at odds with each other. Like the gaming studios and Game Pass. I think they've done a good job of covering the base tech, but it's so hard to separate that from some of the strategy decisions that they've made.
It's neat too, with Microsoft here, you mentioned that Activision. Their IP is what really helped boost them up in this grade. So there's more than just internal filings here that have benefited them. It's also acquisitions. So there are lots of ways to get it done. That's right. Next question for you. Does it cover competitive differentiation?
Yeah. And this is a tough one. Like you said, Ian, it's really hard to parse out what is competitively differentiating from a technology perspective. Right. What has been a differentiator for all of these companies over the years, and we covered extensive history, is the business strategy right, has been a big differentiator.
Like the expensive connects, the expensive Blu-ray players, the expensive, all these things have not really moved the needle. It's the, it's all the other stuff. So we gave them a C. This one was a tough one yet. Go ahead, Ian. Just in general. 'cause you could say that they haven't gotten into a lot of, they haven't stepped on each other's toes very much in an ip.
Sense. But yeah, it just didn't seem very different between each of them either. Yeah, that's a tough one. But yeah, why don't we go to the next one. Sure. Benchmarking against competitors. Ian, what do you think? You looked at their portfolios in detail. Yeah. How would you rate them and why? So for this one, I gave them a C.
And this one was interesting for me because Microsoft doesn't file as much as Sony doesn't have the success that Nintendo does in their filings and they don't, they use up all their IP in these four areas. And while as our competitors are, our other groups have some leftover to to pursue other things, they seem to Nintendo and Sony just seemed better balanced overall in their portfolio.
And Microsoft seemed a little bit more. Overinvested in some areas, so I gave them a C. It's hard to compete against Nintendo when they're getting such a, a high allowance rate, and you have to ask, why aren't you getting that as well? The next two, does it exclude important competitors and does it align with forward looking r and d spend?
Mm-hmm. I would maybe flip flop those grades. So I would say I think they probably do a good job of excluding competitors, so maybe that ought to be a B, like Microsoft hasn't asserted their patents against competitors, but I think they could, right? Like the quality of these patents I thought were pretty high, and if they wanted to exclude Sony and Sony and make it harder for them to have a competitive console, I think they could, I think Sony could do the same to Microsoft, and this is why we don't see them asserting these patents against each other.
But I think they do a good job of potentially excluding competitors. Okay. At in practice, exclude competitors. That's a tough one because how big these companies are. Because how good each other's patents qualities are. So maybe that's a B, but I think does it align with forward looking r and d spend?
Maybe that's a C or a C minus, right? Because sure, they have patents on these ga uh, these different divisions, but they're so overweight on the console market and maybe that's gonna be the, the least important business line for them. Right. Um, it seems like all the r and d spend would go towards the game pass model and the publishing model.
So maybe those two things ought to be like 60, 70% of their portfolio, whereas currently those two things are what, 30%, 10%, including the game pass. Yeah. We're up to 30%. We include that as well. Yeah. It's interesting going through this. I think we had a lot of debate about this scorecard more than any of the other ones.
It just felt a. Jumping between A's to B'S to C's and back again tomorrow, we may feel even differently. Who knows? That's right. I think there are some things we can say is that they have done a good job on their patent portfolio. Mm-hmm. They have done a good job of mining patentable technology. It is.
It's just the business strategy is muddled and that has a knock on effect on the patent strategy as well. Yeah. There's a downstream effect of, if you've got a muddled business strategy, it makes sense that your IPE strategy is a little muddled as well. Yes. Uh, our last question, does it anticipate potential horizontal or vertical integration in the industry?
I don't think so. Just because if I'm their patent counsel, I'm getting the business people to think long and hard about what are the business models that we're gonna let go of or potentially write off or sell, and then do some additional kind of strategic investments in that space. I don't think we saw any of that.
We see a lot of investment in the console business. We saw some investment in the ar vr business, which doesn't seem like they're gonna sell off at this stage. They've just closed that business unit down. Mm-hmm. Um, but yeah, that's tough. And also, like Sony, we saw their hockey stick, uh, filing growth curve, and which I think makes sense, right?
If you are anticipating a lot of litigation and integration happening, you need to file more patents to carve out more spaces for yourself. Okay. Like your goal from it goes from being defensive to being offensive on the patent portfolio. So. Right now, when you're in a growing space, the model on the patent portfolio side is to initiate a deante of sorts, right?
But when the pie starts shrinking, you're gonna have to start generating revenue from other places other than business. And that is through legal is one of the, one of the levers that a company can turn. So I would ramp up some of my patent filings at this stage in anticipation of that integration or in anticipation of litigation.
Whereas Microsoft is almost ramping down its patent filing while Sony is ramping up its patent filing. Right? So there's a pretty stark contrast there. Mm-hmm. In terms of the approaches these two companies are taking. And that's something to think about. Although like I, I can see the other side of the argument as well, right?
That if you are in a shrinking marketplace, then you need to shrink down your legal costs in conjunction, right? Otherwise you're gonna be overweight on your legal spend. So I. See it both ways, but to me, I don't see a lot of strategic thought process in their portfolio about ramping up a portfolio or ramping down a portfolio.
So I was gonna ask, does that ramping down indicate a strategy to you at all? Something that we could make a conclusion about? Yeah, we do see some ramp down in their console patent filings, right? So maybe, mm-hmm. Like even though 50% of their portfolio is related to that, it's becoming a smaller percentage as you move forward.
So there's some of that acknowledgement, which is what keeps them from getting an F here probably. But we don't see, we see a ramp up in their ar vr filings, but that business unit's getting shut down, so that's confusing to me. We see not a lot of growth in the streaming game pass. Filings, and that's curious to me that if you, that's gonna be your dominant business model going forward.
Mm-hmm. Their gaming studio patents are flatlined as well. If that's gonna be your dominant business model going forward, you'd wanna see a ramp up there. I just don't see a cohesive patent strategy that anticipates these kind future events happening in the industry. That which would be a potential consolidation of some sort, or a writedown of some sort.
Alright. Any final thoughts you'd like to leave our listeners with? Yeah, I don't have, just like this, the Microsoft strategy, I am just feeling as muddled. Hopefully our listeners are not, but yeah, this is a tough one. I think, I get it. Microsoft wants to try a bunch of things. It's just that the bets that they took are so big that like it, it really has sewn them in from, you know, doing experiments further like they have to.
Running up the middle, so to speak, because you can't take a lot of risk anymore. Makes a lot of sense. They've put themselves in this position and they're gonna continue on with it. Thanks Summer for sharing insights on this. I think this was worth the wait still. Yes, you too, Ian. This portfolio was not easy to parse and you did a great job, so I appreciate that.
This is fun. I had a great time as well. Awesome. Thanks everyone for listening. We appreciate it and we'll see you on the next one. See you in the next one. Take care. The Patent Strategy Podcast is recorded for informational purposes only and should not be considered legal, business, or professional advice.
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