Game On: Wedbush’s Pachter says Xbox studio closures not a ‘creeping issue’

For this bonus edition of “Game On,” The Fly spoke with Wedbush Securities analyst Michael Pachter on a number of subjects in the video games sector. In the exclusive interview, Pachter gives his thoughts on recent Xbox (MSFT) studio closures, the future of subscription services, and more.

MICROSOFT STUDIOS: Earlier this month, Microsoft shut down a number of studios it acquired in the Bethesda takeover several years ago, including “Hi-Fi Rush” developer Tango Gameworks and “Redfall” studio Arkane Austin. The closures have led to speculation about the current state of the other developers it has acquired over the years, including Ninja Theory, whose newest game “Senua’s Saga: Hellblade 2” released next week.

When asked if studios like Ninja Theory should be concerned given recent events, Michael Pachter said the studio should be the “least concerned,” adding that they’re a “really good” studio that makes high quality games. “I don’t want to cast aspersions about Arkane Austin, but ‘Redfall’ was bad,” the Wedbush analyst said. “(This is) more about (Microsoft Gaming CEO) Phil Spencer being pressured by management to tighten the belt and firm up profits. Do they really need to worry about a couple hundred people in Austin?”

“Knowing Phil (Spencer), I think he was basically told to generate an X-million-dollar profit, and they did it all at once,” Pachter added. “I don’t think it’s a creeping issue.”

GAME PASS: For many years now, Xbox’s strategy has seemingly centered on Game Pass, its subscription service on console, PC, and cloud. With Game Pass subscriber growth slowing amid a broader industry plateau in subscriptions, The Fly asked Pachter if major players in the sector will curtail some investment in such services. “Everybody does it a little differently,” Pachter said. “The short answer is no. EA (EA) dropped Origin, but they’ve never been serious about it. Ubisoft (UBSFY) might have been on the verge of giving up, but they got the worldwide rights to stream Activision content, so why wouldn’t they put it on Ubisoft+? They’ll give it a go for a year or two and see if it works.”

The analyst mentioned that Ubisoft could potentially sell Activision Blizzard streaming rights back to Microsoft, or even potentially Sony (SONY). “I don’t think the trend (for subscription services) is going to be down,” he added. “What Sony will do at a minimum is bid on this stuff to force Microsoft’s hand. I think Ubisoft is going to play this smart, and they’ll get to make sure there’s more than one bidder for Activision Blizzard streaming rights.”

EARNINGS: With all the major game companies reporting quarterly results recently, the Wedbush analyst said what “jumped out” to him was AppLovin (APP) doing “so well.” “There’s clearly a shift of mobile ad user acquisition dollars away from Facebook (META) and to AppLovin,” he said. “Effectively, you’ll start to see mobile gaming grow. I think you’re about to see a revival of mobile revenue growth.”

IN-GAME ADS: On the company’s earnings call earlier this month, Electronic Arts CEO Andrew Wilson said he sees advertisements as a “meaningful driver of growth,” adding he wants to be “thoughtful” about how such ads could be integrated into the publisher’s titles. “I think EA has been doing that for a long time, a company called Player Won has put ads into console games,” Pachter said on the matter. “Will we see interstitial ads in FIFA Ultimate Team? Probably not, but we should.”

“What EA and Take-Two (TTWO) can do is do sponsored season passes,” the analyst added. “I think that’s coming. Will EA pioneer that? I don’t know, but it’s coming. We already see Roblox (RBLX) do that.” Pachter also said it’s possible we see ad-supported subscription tiers for console games.

SWITCH SUCCESSOR: Nintendo (NTDOY) recently confirmed that the successor to its Nintendo Switch console, which first launched in 2017, will be officially unveiled within this fiscal year. When asked if the next Nintendo console will largely be iterative on the Switch or if it will come with more unique hardware differences, as Nintendo has done in the past with the Wii and DS, Pachter said if Nintendo is “smart,” they’ll just get rid of the Switch docking station. “If they can make the Switch work with a dongle or something, and use the handheld switch as a controller, that would be super appealing,” he said. “Then you can power the console like its truly HD. I think that’s more likely what they’d do. Then, theoretically, it could also be backwards compatible.”

“If you get rid of the docking station and make the standard version LED and HD, and make it bluetooth compatible with a dongle, it will be really cheap to make, and you won’t have to sell multiple versions,” Pachter continued. “I think that’s what they do. But you never really know what Nintendo’s going to do.”

“Game On” is The Fly’s weekly recap of the stories powering up or beating down video game stocks.