Ep. 4 : Microsoft Xbox Patent Strategy: How Innovation Shapes the Future of Gaming

Samar Shah (00:06)

Hello and welcome to the Patent Strategy Scorecard Podcast. I'm your host, Samar Shah and with me is Ian Holloway. Ian, how are you?

Ian Holloway (00:15)

It's good to be here. It's good to talk about this one here. yeah, it's been a good week so far. How about yourself?

Samar Shah (00:24)

Awesome.

Yes, this one, man, it was a tough one. I think from a analysis perspective, both on the business strategy side and the patent strategy side. So we struggled a little bit with this one, huh?

Ian Holloway (00:35)

You

Yes, indeed. There was a little bit of confusion, I think, on what exactly was the most interesting part of this whole situation. But I think we've nailed it down.

Samar Shah (00:51)

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. said that, Hey, parsing the patent portfolios of large, know, 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.

Ian Holloway (01:23)

Yeah, let's move on to Alphabet next after we've done this one. Let's just go crazy.

Samar Shah (01:27)

Yeah, easy.

Well, 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. I think that will help set the stage. So, you we're going to take a walk down memory lane, hopefully, for our listeners. And, you know, I certainly remember being a part of many of these, you know, battles in the gaming industry. But 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 are making today?

Ian Holloway (02:28)

Yeah, with that let's jump into the history of video gaming. To me, this just sets the stage for the work culture in these different companies.

Samar Shah (02:33)

Okay.

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 like fascinating. It's so interesting how these things developed and came to be and how some of these companies got started. Usually there were some animosity between the founders and the CEOs and they took lots of risks and we have a very large market that they have.

created but Atari, Sega really started the market and kicked off the console market, think. Eventually, there was a big recession in the gaming industry. There was a big overinvestment in the space, a bubble, if you will, and 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.

Ian Holloway (03:25)

Mm-hmm.

Samar Shah (03:36)

And that is all the way up until the mid to late nineties, which is when Stony, Sony comes about. and I think you have a good anecdote about the CN, ⁓ how Sony actually got started.

Ian Holloway (03:47)

Yeah.

So Sony originally was hired by Nintendo to develop a disk drive for their Super Nintendo console. They were like, hey, we've got this great way to store data, to run games. can provide better music, better graphics. Nintendo let them develop all that. And then when Sony was done, Nintendo said, yeah, we don't need it. We're going to stick with cartridges.

Instead of just walking away, Sony decided to say, alright, let's enter this market ourselves.

Samar Shah (04:21)

Yeah. And Sony is very shrewd, 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. So in this industry is no exception, right? So...

What Sony figured out is that games are becoming more and more graphics intensive, right? That is kind of 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. You know, I have a Nintendo Switch and when I download Mario Kart, it's like one gig or no, it's not even one gig. It's like, you know, 600. Yeah, it's like.

Ian Holloway (05:15)

I would say it's even smaller, yeah.

Samar Shah (05:18)

It's surprisingly small, it might even be like 200-300 megabytes large. And then when I download the NBA 2K game, it's like 3 gigabytes. So it's massive in comparison. 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 developers were spending more and more time developing really...

you know, complex graphics and, 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, they're able to, ⁓ you know, 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 kind of steps in and cleans up that marketplace. I think they become the dominant player by the time PlayStation 1 and PlayStation 2 comes out.

Ian Holloway (06:27)

Yeah, I think so. And to me, this seems like a level of control that both sides kind of took a different path on. I don't know if you can look at it this way. 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 kind of allowing third parties to kind of come in.

and make your brand better.

Samar Shah (07:00)

That's right. Yeah, Nintendo, 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 want control, like you said, right? And they can control the cartridges because they own the IP on the cartridge itself. So, you know, like they had all sorts of restrictions, like if a game...

developer wanted to 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 is just a painful company to work with by all attempts. And they also took a big chunk and margin out of these games as well. So they said, hey, if you want the privilege of being on our platform,

Ian Holloway (07:32)

Yeah.

Samar Shah (07:52)

You had to pay us all these royalties and all these portions of your sales and all that stuff. So not only does Nintendo end up with an inferior product, so to speak, but they also are just more difficult to work with, and that's the one-two punch that allows Sony to just really step in and take market share away from them. And I think Nintendo goes from the top console provider with...

Ian Holloway (08:09)

Mm-hmm.

Samar Shah (08:20)

The original Super Nintendo, right? To becoming like a very distant, what was it? The Nintendo GameCube or something like that, right? 64. Yeah, yeah, that's right. So yeah, so they become a very small percentage of the market. They niche down and they have...

Ian Holloway (08:29)

That would be the Nintendo 64, I think, with the PlayStation. Yeah, yeah.

Samar Shah (08:44)

They start playing a slightly different game right because they can't compete with Sony and PlayStation and these like really graphics intensive games

Ian Holloway (08:51)

So let's get into when Microsoft is finally going to enter this market then, right?

Samar Shah (08:56)

Yet, Microsoft has another perspective on this thing, right? So they want to 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, we're going to come in and we're going to undercut Sony. So we're 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 slower, cheaper alternative. And Microsoft really is able to take a lot of market share away from Sony. They become kind of in equal footing, I think.

⁓ and I think with the PS three generation, would be what early, early to mid two thousands. Yeah. So, ⁓ you know, I think they come out with the X-Box 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.

Ian Holloway (09:59)

That's correct, yes.

Samar Shah (10:21)

and kind of develop that console business line for themselves.

Ian Holloway (10:26)

So they're able

to just outvalue Sony at this point in time.

Samar Shah (10:30)

That's right. That's right. So Microsoft's doing this. Simultaneously, Sony is going in the opposite direction, right? So they're saying they come out with the PS3 and they offer much better performance than Microsoft. They include like a Blu-ray player, which is pretty expensive technology that they have to license. And they really...

really get their clock cleaned by Microsoft in this generation, right? The Xbox One outsells PS3 for the first time ever. And mostly it's because Microsoft's offering more, you know, 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.

Ian Holloway (11:24)

So Microsoft has a great strategy coming in at that lower price. They must maintain that strategy then, right? Since they've carved out that niche for themselves.

Samar Shah (11:32)

You would think, right, hey, if

it works, definitely don't keep doing it. And this is going to be maybe a theme. And this is why we were 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 yeah, so you would think Microsoft's going to be like, okay, well, this works. We're always going to undercut Sony by a hundred dollars, right?

Ian Holloway (11:36)

That's right, that's right.

Mm-hmm.

Samar Shah (12:01)

because 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. If you were a game developer and you were developing a game for Sony PlayStation 1, for example, and you wanted it to also work on Nintendo 64, it was very difficult. You had to basically rewrite the...

the code and maybe do lot of enhancements on the graphics because they had very different performing graphics capabilities. So it was like making a whole new game at that point for them. the developers would only pick one console and they'd say, hey, we're either going to be on N64 or we're going to be on PlayStation 1. And there wasn't a lot of cross compatibility there.

Ian Holloway (12:55)

So we have a lot of exclusive games, right? So you might pick a console based on what games are available on it. OK.

Samar Shah (13:01)

Yes, yes,

that's right. And you know, like it wasn't an exclusive as we think about it today because, you know, exclusivity implies some like contractual obligations, but there were, was no contractual restrictions. Like game developers, just didn't make sense for them to like 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, ⁓ you know, 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. And then that changes, right? You have these game engines that come online, like there's the Unreal Engine and the Unity engines, which make it easier to port games from one console to the other. So by the time you get to the PlayStation 3,

Ian Holloway (13:49)

Mm-hmm.

Samar Shah (13:58)

PS4 and Xbox One generation, almost all the games are on both platforms, right? Because you just have to do some coding, but it wasn't a huge amount of coding.

Ian Holloway (14:10)

It's not making a whole new game at this point. You just... Small investment for a pretty big payoff, assuming you're reaching out to the other half of the video gaming consumer base.

Samar Shah (14:12)

That's right.

Exactly right. So 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 because 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 3 battle versus Xbox One battle is finished, you know...

I think Sony smartly recognizes that. They just got their clock clean with the PS3. They're like, okay, well, what do we do now? Because we won against Nintendo by offering just a bigger library of games. But that's not going to work against Xbox, because all the games are on both of our libraries. So that's not a way. Then we also tried to just offer better graphics performance, game performance.

That didn't work either because our PS3 was way better than Xbox One. So what do we do? Right? 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 niche gaming studios, right? And make those games exclusive to PlayStation. So they weren't big drivers. Like nobody would...

Ian Holloway (15:41)

Okay.

Samar Shah (15:47)

They weren't like Madden or Call of Duty or Giant Games. It's not going to be the number one decision for you to buy a console. if you had top five games, maybe one of the top five were going to be only on Sony. So you'd be kind of incentivized to purchase a Sony console as opposed to an Xbox console.

Ian Holloway (16:09)

They're making small bets, hoping for a big payoff in it, but if they lose, it's not a big loss to them. Makes sense to me.

Samar Shah (16:16)

Yeah, and it is in many ways like revenue destructive, right? Because if you are, you know, 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 cost with making the game. And then 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 development cost as possible as well.

So that's where Sony says, well, we're gonna take a hit on, know, forgoing this revenue by 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, PS4, right? They don't include the expensive Blu-ray technology. They don't have the latest, greatest chips on those PS4s. And so they...

Ian Holloway (17:07)

Mm-hmm.

Samar Shah (17:30)

reduce the cost of that console quite a bit. They say, in fact, they really cut in their margin, at least in the early stages of the PS4 generation. They also said, hey, we're going to make up some of that loss margin, or we're going to sell the console at cost, essentially, but we're going to make up that revenue in the software sales. One of the things, I don't know how well-known this is, but...

Ian Holloway (17:42)

Mm-hmm.

Samar Shah (18:00)

gaming companies like PlayStation and Xbox will take 30 % of revenue from the sale of Matin. That's a licensing fee. So if Matin wants to be on PlayStation, Matin has to pay 30 % of the revenues to the console maker for the privilege of being on the console. And everybody does that. So Sony said, hey, well, we're going to lose some margin on the actual sale of the console, but we'll make that up in our software.

Ian Holloway (18:07)

Mm-hmm.

Samar Shah (18:31)

So they have a of two-pronged strategy. One is to... And both of these strategies are not without risk, mean, you're incurring losses in both of these things. So like this is really pretty amazing and prescient of Sony to do this. Hey, we're going to buy these indie developers and we're going to make them exclusive and we're going to lose revenue upfront for doing that. And then we're going to sell our consoles at cost and we're going to lose revenue from doing that as well.

And the hope is that we'll make it up on the backend.

Ian Holloway (19:02)

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 success in this market.

Samar Shah (19:12)

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 going to be enough. What worked in the Nintendo battle is not going to 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.

The audience wanted not the most performant, like best gaming experience. They wanted something good enough, but at a slightly lower cost point. So they read the market really well, I think.

Ian Holloway (19:55)

Oz goes to Sony, I guess. So what's Microsoft doing during this time?

Samar Shah (20:00)

Yeah, Microsoft, as you said, instead of pressing their advantage and doing what they would work to gain even more market share and become even more dominant, they kind of go in the opposite direction. And in fact, during the PS3 battle and the Xbox one battle, everybody was like really waiting for the next Microsoft and Sony consoles. And everybody anticipated that, when Microsoft comes out with their next one,

Ian Holloway (20:03)

Yeah

Samar Shah (20:27)

they are going to be the dominant console player in the industry. But instead of doing that, they kind went in a slightly different direction, maybe in a completely opposite direction. 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...

Ian Holloway (20:41)

Okay.

Samar Shah (20:57)

big theory that like, hey, you know, every household is going to have a PC and then they're also going to 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. they have three different ones. ⁓ and yeah, yeah, totally. ⁓ so they said that, Hey, this is going to be your streaming device for your television. ⁓ you can like, ⁓

Ian Holloway (21:12)

They just keep it simple for you, I guess right

Samar Shah (21:26)

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 going to 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, you know, which are these like hand hem.

Ian Holloway (21:41)

the

motion control type stuff.

Samar Shah (21:44)

Yes,

yeah. And both of these things added significant cost to their consoles. So now in the next generation, PS4 is the cheaper console and Microsoft console is $100 more.

Ian Holloway (22:00)

wow. Can you think of why they would want to make this kind of change to kind of switch strategy right there at this generation?

Samar Shah (22:08)

yet.

That is, and this is why I think, I still don't know why Microsoft got into the Xbox business to begin with, right? Maybe this was their vision is that, we're going to, 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...

Ian Holloway (22:18)

Mm-hmm.

Samar Shah (22:37)

Another PC use case is video games, right? So maybe this was part of their big plan all along. Maybe, I don't know. Or, you know, maybe they just want to go a different direction because they were like, you know, like we're obviously going to be the winners of this, this thing. I think they missed the boat, right? Cause like actually it didn't go into the PC didn't go into the living room. It went into your pockets, right? Like a, the actual PC.

Ian Holloway (22:43)

Okay.

Samar Shah (23:06)

was the iPhone or the mobile computing device. they, think they just maybe misunderstood the market or maybe they just were like, so, so convinced that everybody's going to have a PC in their living room that like, this was very obvious to them. I don't, not really sure.

Ian Holloway (23:26)

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.

Samar Shah (23:37)

Yeah, I think so. So, you know, in this generation, the PS4, Xbox One, Sony just completely cleans Microsoft's clock, right? Very limited sales for, I think, for the Xbox, you know, the original Xbox that went up against PS3, I think Microsoft sold something like 84 million units. And then for the Xbox One generation, they sold 25 million units, right? So they just, yeah.

Ian Holloway (23:46)

Hmm.

my goodness, that is a...

You weren't kidding when you said they got their clock cleaned.

Samar Shah (24:10)

Yes, that's right. They just, ⁓ it got demolished by Sony here. ⁓ and, and yeah, I, I don't know. 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, right. Maybe they thought, ⁓ people want, want this thing and want a PC in their living room. They want their TVs to be connected. ⁓ 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 around the same time frame.

Ian Holloway (24:51)

And I know we don't talk too much about Nintendo for the rest of this. What are they doing during this era here?

Samar Shah (24:59)

Yeah, Nintendo is kind of 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, they have an interesting culture, let's say, at Nintendo.

Ian Holloway (25:18)

Yeah, yeah.

It seems to work for them, I guess. They're not trying to be the dominant force anymore, right? Our two players from here on out are pretty much Microsoft and Sony.

Samar Shah (25:29)

Yeah, I think Nintendo's philosophy is that we're going to make money on everything. Xbox and PlayStation famously don't make any money when they first come out, because they're buying really high-end chips. And then two or three years later, those chips become very cheap 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, we're going to forego revenue today.

They just never want to forgo any revenue, even if it limits their market potential. They make a lot of money. They're incredibly profitable relative to Sony and Xbox, but they just have a much smaller market at this point. They can't compete on performance, but they can compete on user experience and that kind of thing. It is interesting, which is maybe also smart on Nintendo's part. Maybe they realize that,

Ian Holloway (26:09)

Mm-hmm.

Samar Shah (26:28)

We don't want to 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, right? Nobody's going to have both, but then they also have a Nintendo.

Ian Holloway (26:45)

Mm-hmm.

They've got their own little

side. Yeah, well, yeah, the Nintendo wanted as much. It's not as good, a little cheaper, but yeah, we can get what they're putting out. Sure.

Samar Shah (26:54)

Yeah.

Yeah,

that's right. But I don't know if many households growing up that had both an Xbox and a PlayStation, would be... That's unheard of, at least in my circles growing up. Okay, so the market is diversifying quite a bit. So we have Sony that is doing high-performance gaming. They are mass market.

Ian Holloway (27:08)

Yeah, yeah. ⁓ same here, same here.

Samar Shah (27:25)

We have Nintendo, is niche market, low-performance gaming. And then we also have, with the advent of mobile phones and Facebook and Apple, mobile games, right? That are also coming in at the very bottom of the market, which are like the Candy Crush and Farmville games and all that stuff that...

Ian Holloway (27:36)

Mm-hmm.

A low investment

opportunity, I guess, for game.

Samar Shah (27:45)

Yeah,

and usually they start off as zero dollar investments for the user. So gamers would spend 20, 30, 40, $50 on a game, on a CD, but most casual gamers weren't going to spend that kind money on a game. But they would play something if it was free or if you can buy it for like a dollar or $5 or $10, whatever it may be. So 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, or making these products available.

Ian Holloway (28:21)

Mm-hmm.

Sure, sure.

Samar Shah (28:24)

Okay, so everybody's kind of picked their niche, carved their niche at this point. Microsoft got its clock cleaned. We're in 2010s, 2020s now, and Microsoft.

Ian Holloway (28:35)

Yeah, moving up to

present day, closer and closer.

Samar Shah (28:38)

Yes, that's

right. So Microsoft is the one left without a dancing partner at this point, right? They're kind of rudderless, I think. They're like, okay, where do we go? Do we go high end? Do we go low end? We're like, how can we carve out a niche for ourselves? And the other thing that's happening here is that the gaming industry as a whole was just growing by leaps and bounds.

It has stopped growing at this point, right? I think the market has kind of stagnated a little bit. You know, there's just not. Yeah, that's right. So, so, so Microsoft is like, what do we do? And I think when you're rudderless like this, I think it makes sense to try out a bunch of things and see what works and like see where you can carve out a niche and find a really profitable and high margin business and a high velocity business.

Ian Holloway (29:14)

And not nearly as fast these days, right? Yeah.

Okay.

Samar Shah (29:36)

So I think Microsoft starts taking some bets. Okay. So they start acquiring studios kind of like Sony. ⁓ you know, yeah, you would think, but no, they go big. They, they buy, well, they buy, ⁓ Activision, Blizzard, ⁓ the makers of the Call of Duty franchise for about $80 billion. ⁓

Ian Holloway (29:44)

So they're making little bets like Sony was?

Samar Shah (30:03)

They buy Zenimax or Bethesda, the makers of Fallout for many billions of dollars. They buy Minecraft for, what is it, $8 billion or something like that. So yeah, they're not tiny bets. They are giant epic proportions bets.

Ian Holloway (30:25)

my gosh, my gosh. So these have

to pay off big for Microsoft to succeed in this day and age, right? Like why would you spend $80 billion on a gaming studio?

Samar Shah (30:31)

Yeah, and-

Yeah, very curious, right? So Sony bought these studios, these like Indies franchises and Indie studios and make them exclusive to Sony, right? So a lot of people and actually are kind of regulators were concerned that Xbox was going to buy these studios and make them exclusive to Xbox as well. But they don't, right? And actually in reality, they can't.

Ian Holloway (30:44)

Mm-hmm.

Samar Shah (31:06)

because of the unit economics of this thing. So if you have Call of Duty that you bought for $80 billion and you say, hey, I'm only going to make it exclusive to Xbox, which is maybe 30 % of the market. So then you would chop off the value of Call of Duty by about 60%, 70%. And that's a big write-off for Microsoft.

Ian Holloway (31:12)

Mmm.

Mm-hmm.

That's an undoable amount of money. You can't make that choice.

Samar Shah (31:36)

Yes, that's not going to happen. yeah, like they, because these acquisitions are so big, they can't make them exclusive. Like that's not going to work. but they buy them anyways. I don't know what opportunity they saw, but they're like, maybe, maybe all the, maybe they saw that, Hey, in this world, all the profits accrue to gaming studios and not the console makers. Right? So like maybe that's

part of the reasoning here is that like, okay, well, instead of competing, if you were to take the analogy to PC makers, right? Like if you were a Dell or an HP, you're kind of a low margin business at that point, but you know what is high margin is the Windows software, right? So like we are going to take most of the profit margins in this ecosystem. And we, know, like these games are like Windows and then the

actual consoles are more like HP and Dell, their utilities in a sense. So maybe they saw that as an opportunity. They also famously bought Activision at a very low valuation. They bought them at their, you know, when they were going through some legal troubles, right?

Ian Holloway (32:31)

Okay.

They had a few problems with their leadership there, didn't they? Some bad press and just in general mismanagement.

Samar Shah (32:54)

That's right. were all these sexual harassment allegations against the CEO. The CEO had stepped down. The stock price had taken a huge hit. And I think it was kind of an opportunistic buy from Microsoft. They're like, hey, this thing is usually worth a hundred billion dollars, but we can get it for 80. So, you know, like that's that's a good deal. And they bought 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.

Ian Holloway (33:14)

Yeah, yeah.

Yep.

Samar Shah (33:23)

⁓ but, but yeah, this, maybe that's the thought process is that, all the values are accruing to the gaming studios. So let's be there. Cause that's like the high margin business. Maybe.

Ian Holloway (33:34)

Okay, okay, that's fair.

Samar Shah (33:35)

Which

kind of makes sense, you know, 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. Okay. So they then, so to me, I was like, okay, maybe Microsoft is just moving in a different direction. Xbox is not going to 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 in this value chain. But then Microsoft does something really weird. They launched the Xbox game pass and you know, the whole, maybe we should talk about what this game pass is, but basically it's yeah. Yeah, go ahead Ian. don't you.

Ian Holloway (34:18)

I say, yeah,

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?

Samar Shah (34:44)

That's right. That's right. I mean, I think when they launched, it was exclusive to Xbox. The whole purpose of the Game Pass was, hey, this is going to 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, well, they bought

Activision and Blizzard, not because of they want to be a gaming publisher now, 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 want to sell more consoles. So that's kind of maybe kind of the logical thread here, which really doesn't make any sense to me at this point.

Ian Holloway (35:36)

Well, why wouldn't Activision and Blizzard want to be on the game pass normally? Like, if Microsoft hadn't bought them, wouldn't they still want to be on this game pass or not?

Samar Shah (35:45)

Yeah, good. Not at all. because you know, Activision is selling call of duty for $80 a disc, right? ⁓ if they are on the game pass, you know, game pass is what? $9 a month or $12 a month, something like that. ⁓ they are getting a percentage of that site. So instead of getting $80 upfront from a customer, they would get, you know, $4 a month from a customer. And that customer would have had to pay, play call of duty for like what?

three years or something like that for them to make up the revenue. Which is not going to happen, right? These games are addictive, but they're not that addictive for that long. So, yeah, so they launched this Game Pass and they're like, it's going to 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 want to be on the Game Pass.

Ian Holloway (36:19)

No, no, no way.

Samar Shah (36:41)

Not a great value proposition for us. We're not going to go from $80 a game to a few dollars a month. That's a bad value proposition for us. So I think they buy these gaming studios to get them on the Game Pass. And 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, which would be me, by the way, right? 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? Like that's a great way to do it.

Ian Holloway (37:24)

That's not a

bad value for you there.

Samar Shah (37:27)

Yeah. ⁓ so, so maybe that's the idea there is that, 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 right.

Ian Holloway (37:43)

No, no, it's all at odds here.

Samar Shah (37:48)

Yeah. So instead of being like a virtuous cycle, it just becomes, like you said, ⁓ total whipsawing or at being at odds at each other. So the studios require a horizontal distribution model, kind of like the Netflix and Spotify, ⁓ models that we talked about. They want to sell to as many people as possible for as high a price as possible. Right? Cause you have a huge upfront investment. ⁓ and then the distribution costs are basically zero.

Ian Holloway (38:16)

Zero, yeah.

Samar Shah (38:18)

Consoles are the exact opposite, right? You want to sell as many as possible and you want to have as many exclusive as possible to drive that sales decision. Because otherwise you're competing on price and then you're already selling these at cost in the first couple of years of the game console. 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...

Ian Holloway (38:34)

Mm-hmm.

Samar Shah (38:44)

value destructive to large studios. Because it costs a huge amount of money, these gaming studios, to make these games. They're almost like Hollywood studios at this point, right? 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 an indie gaming model where you spend a few hundred thousand dollars making a game, and then you can...

survive off of and make a great business out of, know, $2 a month or something like that. It doesn't work that way.

Ian Holloway (39:19)

Nope, nope. So we're kind of all over the place here with Microsoft, right?

Samar Shah (39:25)

Yeah, yeah, it is tough. mean, it's a beautiful theoretical model, right? That like, ⁓ all these things are going to feed into themselves and we're going to grow the market and we're going to just dominate and crush it. But I don't think it reconciles with the economic reality of all these various business lines and models. Like we said, because these gaming studios they acquired are so expensive that Microsoft is overweight there. And that's maybe the real problem.

Ian Holloway (39:50)

Mm-hmm.

Samar Shah (39:55)

is that because they're so overweight on these gaming studios, Microsoft is essentially a gaming studio now, right? So like they can't, so Sony, because they acquired these niche gaming studios and made them exclusive, like that's value destructive as well. Like there's no doubt about it. Instead of like being on a hundred percent of the consoles, they are on 60 % of the console or 70 % of the consoles. So they are forgoing, you know, all this revenue by making them exclusive, but

There's also this philosophical or human aspect of this. It's so much easier to forego revenue that you don't have when you acquire a company for X amount of dollars. And then you say, okay, well, we're going to forego X plus 10. We're going to make that up later. But it's so much harder to say, hey, I bought a company for X amount of dollars.

But now, this company is going to be worth X minus 50. Even though the math might be the same in either direction, the human component of it is it's a write-off. It's a big, big difference.

Ian Holloway (41:04)

Yeah.

Samar Shah (41:07)

So, when you forgo revenue, you just don't hire people, right? Like that's okay. 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 going to write off like $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 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, they're kind of 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, may be, Microsoft is worse off. It's really hard to make these choices now.

Ian Holloway (42:06)

my, so in general, you're that Microsoft business strategy moving forward is we're going to be a game studio? Or is that the choice you would make at this point?

Samar Shah (42:18)

⁓

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 and you cannot downsize any one of them to make the other one work in like, cannot downsize one in the short term to make the whole thing work in the longterm. ⁓ that's too painful, too much of a loss of value, ⁓ to value destructive. So

probably, you know, makes sense to write off something. The gaming studios, I would not write off. That's just way too expensive. Even for Microsoft, yeah, you know, that's untenable to lose $100 billion or something like that. To be clear, they wouldn't lose that much, but it's still huge. Maybe the console market, you know, I would maybe write that off and say, okay, you know, what we are going to be is the gaming studio of

Ian Holloway (42:52)

Yeah, just huge investment there.

Samar Shah (43:14)

of the video game market as well as maybe the software layer. Like if we can get Game Pass off the ground and get a bunch of games on there, we could be the software layer, right? Like Windows for all these console makers or PC makers. Maybe. Maybe you can do it that way. But it's tough because Sony has cornered the market. So unlike Lenovo and IBM 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, especially if Microsoft sells a console business. So maybe the software layer is untenable for them as well. yeah, right. So Sony would say, yeah, no, thank you for your software, but we're going to make our own software.

Ian Holloway (44:03)

They would just get squeezed out by Sony at that point, right? my goodness.

Samar Shah (44:11)

Something like that. So yeah, I don't know. It's a tough spot to be in. Something's going to 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 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. But instead, they're just pursuing all of these business lines simultaneously.

Ian Holloway (44:12)

Yeah.

Samar Shah (44:41)

And they're really limiting their potential on all fronts as opposed to picking a potential and then trying to win on that potential, right?

Ian Holloway (44:51)

tough. Yeah, so that's why we went through all this history because it's kind of interesting to get to this point here. I think if you're up for it, we'll kind of talk about what we would be doing. If we got this kind of business model from the higher-ups where we're kind of pursuing everything, what would we be filing at this point?

Samar Shah (44:55)

Yeah

Yeah. I mean, one thing I would, I would be doing if I was their patent counsel is like, let's think long and hard about what we're going to write off most likely. Right. ⁓ because like, I don't know the writings on the wall, at least to me, ⁓ that like, Hey, what is the most likely thing that we're going to 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.

Ian Holloway (45:30)

Mm-hmm.

Samar Shah (45:48)

just writing the business off, right? Like getting pennies on the dollars. So I would get strategic about one of these lines of businesses and make that strategic. And then I would pick the one that we're going to compete on or battle on and win on most likely and really make that portfolio robust. But outside of that, I guess if...

If my mandate from Microsoft was, help us protect all of these business lines, then I guess I would, for the console market, we would want to file patents on graphics, ray tracing, that kind of thing, anything that makes the console more performant. If they're like,

Ian Holloway (46:33)

If you were going to do a gaming studio side, what would you do for that then?

Samar Shah (46:36)

Yeah, good question. So I would do the graphics, the rendering, the 3D modeling, AI, right? Like 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 UI, UX.

Ian Holloway (46:58)

Okay. Anything to make that

easier, more appealing to a user, right? So you could stream across multiple platforms, multiple devices, things like that. Okay.

Samar Shah (47:04)

That's right.

That's right. And we didn't talk about this a whole lot. We have the AR, VR, XR kind of gaming consoles as well. Microsoft famously acquired HoloLens, although that was more for corporate use cases. You could see a world where that becomes a dominant console platform.

Ian Holloway (47:18)

Mm-hmm.

Yeah, you could have a lot of overlap between the IP that you file for corporate situations and home entertainment there. Sure.

Samar Shah (47:42)

That's right. Yeah, I mean, 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. You also have the Apple, what is it called? The Apple display? I don't know what Apple naming convention. That's right. They have their headset, which is a great environment for AR, VR games.

Ian Holloway (47:59)

it's gotta have a catchier name than that if it's gonna be Apple, right?

Samar Shah (48:11)

So maybe that's another area of gaming that Microsoft could pursue and become dominant in. But yeah, seems like 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 going to close that division down. HoloLens no longer exists.

Ian Holloway (48:18)

Mm-hmm.

So strategy-wise, we're not looking towards that properly at this point. Although it would be interesting just to capture a new market, you know, in that regard.

Samar Shah (48:41)

That's right. Yeah, mean, yeah, I don't know. I see a lot of new patents on augmented reality goggles and displays, but yeah, I don't understand that because there's a bunch of filings about that while simultaneously the HoloLens division is getting shut down.

Ian Holloway (49:03)

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. Obviously this is still delayed by what's actually been published, so keep that in mind.

Samar Shah (49:04)

Go figure.

Yeah.

Yeah. 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.

Ian Holloway (49:30)

Sure. So from what we saw, there really seemed to be focused on consoles in general. Now, as Summer kind of 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 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. So we're looking at that and about 20 %

would say go towards being a gaming studio. And some of this comes from some of their acquisitions as well. 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 under the Microsoft umbrella, but they're getting IP through acquisitions as well. And that's, we're looking at, yeah.

Samar Shah (50:55)

So this is,

this is fascinating. So Candy Crush is owned by Microsoft. Is that right?

Ian Holloway (51:01)

It fell under there for some reason. They like buying things, guess, right? The new thing. yeah, about 20 % dedicated to being gaming studio. You talked a little bit about the HoloLens there. We're looking at about 6 % total towards those optical systems, which kind of leaves not much behind for the Game Pass at this point.

And a lot of that the the UI stuff came from their acquisition of Activision here, so

They're hitting a little bit of everything, but they seem to still want to be a console company.

Samar Shah (51:47)

Yeah, I mean, this is backwards looking, right? So, we don't get a really good forward looking view, just looking at the patent data. But yeah, it's funny, like 50 % of their portfolio is about consoles and that's the one I would write off or write down at some point. know, Microsoft and I are at odds here.

Ian Holloway (52:06)

Yeah.

They are a company that likes to put a lot of investment in whatever they're doing, though, 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 kind of 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, you know,

Two-thirds of their budget is related to it being a gaming studio. Unity, which is also another game engine, did about similar. As far as the interesting... Yeah, go ahead.

Samar Shah (52:54)

Yeah. And

one interesting strategy piece here is that like, I was thinking about this, like if I was Microsoft, what would I have done differently? Right. ⁓ like they really lost this PS4 battle. And at that point, maybe they should have been like, Hey, this is kind of not a great business to be in. Let's just like, right. You know, like let's sell, sell and focus on something else, which they kind of started doing, ⁓ by acquiring all these studios.

Ian Holloway (53:03)

Mm-hmm.

Samar Shah (53:21)

which I think was misguided because these studios were so expensive that Microsoft became a studio themselves. But, you know, like I was thinking about this, like if I were Microsoft, what kind of business do I like to be in? And which is a software business, right? Like that's what the software, you know, like software, we talked about all the advantages. is zero marginal costs to sell and distribute. Maybe I should, I would have purchased Unity or I would have purchased the, you know, the other kind of

with Unity and Unreal engines.

Ian Holloway (53:53)

Unreal, yeah,

another engine to kind of be the publisher, or you support all these publishers, sure.

Samar Shah (53:58)

Yeah,

where you are kind of 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 the...

⁓ moving, ⁓ porting from one console to the other, because based on the percentage of cost of production, it, it would justify it. Right. So, ⁓ so maybe that's a direction that Microsoft could have, you know, this is a sliding doors moment. Like maybe instead of buying gaming studios, they could have purchased these things and then gone that game pass route. Right. And then.

Maybe they would have 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. And I don't know, just something to think about, like if, if, if I were to do things, it's hard to, you know, it's easy to be a Monday morning quarterback, but that's one potential place they could have gone, I think, to really get their game pass model off the ground.

Ian Holloway (55:13)

Sure, sure.

To me it feels like a more unified strategy too. clearly, I mean 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 like, know, if you're that software publisher, that's the way to go.

Samar Shah (55:42)

Yes. So sorry, sorry to interrupt Ian, but yeah. yeah, why don't we maybe parse this down some more for our listeners, know, and how, you know, maybe from a comparative perspective and, or how Microsoft is doing or what these paths look like maybe.

Ian Holloway (55:51)

Yeah.

Sure. 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 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 Microsoft is. So they're much more aggressive in this.

Environment than I'd say Microsoft overall 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 For Sony and Nintendo it was about 60 % so they're able to put their Money into other

you know, maybe tangentially related items, whereas Microsoft is really heavily invested in these four strategies.

So over time, think we saw when Microsoft was in that Connect era, starting out, they slowly invested or filed in the video gaming sector, those kind 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 the late 2010s era.

This was an interesting one. I'll let you speak to this a little bit, 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.

Samar Shah (58:09)

Yeah, you know...

Ian Holloway (58:10)

Is that

a good thing? Is that a bad thing? Or is it kind of mixed?

Samar Shah (58:15)

Yeah. Well, 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, you know, getting a bigger piece of a bigger pie. And those are all business strategy kind of things, right? 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 that's just how I think about this. So maybe it's an indication indicator of, of how the market is growing or not growing. ⁓ and maybe it's an indication of like how.

How well does Microsoft deploy these assets, right? 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.

Ian Holloway (59:25)

Gosh, yeah, it's it's almost I think was 2,500 families or 27 get 2500, but we're looking at and this is just video gaming We're looking at like 10,000 some more. Yeah. Yeah

Samar Shah (59:30)

2500 families.

10,000 patents, right? And

out of those, only like four 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, if you sue me, we'll sue you and it will be...

hugely unprofitable for everyone. So let's have a detente. But if you are going to assert patents, I want to see what the quality of your patents are and how readily are you winning on those cases and that kind of thing. Because to me, that's an indication of strength and value as well. Most of these patent cases were, when they were defendants, they were patent trolls. So they were just like patent assertion companies.

Ian Holloway (1:00:32)

Mm.

Samar Shah (1:00:35)

They don't make any products, their business is to sue people on the patents. The ones where they were plaintiffs were just ancillary, right? One of them was related to connecting peripheral devices, like controllers to a console wirelessly, or using a wheel type of a format to navigate a UI, that kind of thing. So none that were core to the technology or anything like that. But yeah, those are the patents.

Ian Holloway (1:00:56)

Hmm.

Samar Shah (1:01:05)

⁓ I don't think they gave me an indication of like a position of strength or like, Hey, this is a killer patent that like we can, ⁓ extract value out of the marketplace with they were just kind of small ancillary litigations.

Ian Holloway (1:01:19)

I think that 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.

Samar Shah (1:01:33)

Yeah, I mean, think there is differentiation. Maybe there's less of a willingness to assert these patents, which makes sense. If this has been a historically growing industry, then why would you want to enter into litigation, right? And hurt everyone's profit margins, but it's something to keep watching as the industry moves forward and potentially shrinks or at least stagnates.

Ian Holloway (1:01:59)

So you would expect perhaps some more litigation in the short-term future even, perhaps?

Samar Shah (1:02:04)

Yeah, maybe in the medium term future as companies realize that, we're not growing, so we got to find revenue somewhere else.

Ian Holloway (1:02:06)

Mm-hmm.

So we look, we'll move on to kind of some filing trends and we touched on this earlier where, yeah, 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 fit 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%.

I don't how often do you see a rate like that, Summer?

Samar Shah (1:03:46)

That is incredible. mean, for a big company filing that many patents, having that high of an insurance rate is remarkable, really. mean, kudos to them and their lawyers. They've done a really good job here.

Ian Holloway (1:03:57)

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. So I didn't explore it too closely, but it's a potential component of that.

Samar Shah (1:04:18)

Yeah, and they're filing a lot of hardware patents. When I was looking through them, they were about the switch and the physical aspects and the controllers and stuff like that. Easier to get patents on those things. But also an indication of innovation, right? There are real innovations here relative to their industry peers. So yeah, no, kudos to them.

Ian Holloway (1:04:24)

Mm-hmm.

Makes sense.

Yeah. Looked 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 about a 70 % issuance rate as well.

This is going to be mostly filed in China as well.

very aggressive. And poor Unity here at the end. They are kind of our small fish in a big pond. They're filing less than 10 a year and kind of 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 kind their next big focus areas. I don't think that's a big surprise here.

Samar Shah (1:05:52)

Yeah, no, I don't think so. 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.

Ian Holloway (1:06:08)

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.

Samar Shah (1:06:36)

No, no. Yeah, no, was kind of interesting to parse it. 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.

Ian Holloway (1:06:50)

So my first question to you as it is with all our scorecards is does it cover the base tech?

Samar Shah (1:06:57)

Yeah, I think so. We gave them a B+. They do a really good job of covering the consoles, the technology, Presenting information.

Ian Holloway (1:07:07)

I say they're

very involved in that for sure.

Samar Shah (1:07:10)

Yeah, and they've done a good job there. 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, how to render this content, make it more immersive, leverage AI.

Although those are mostly Activision patents that we saw. Like think Activision done a really good job and Microsoft is the beneficiary of that. But we gave them a B plus. think their, you know, game pass, that seems like a big focus for the company moving forward and, you know, very under invested in that space. Not, 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, right? They had the Google stadia.

Ian Holloway (1:07:33)

Mm-hmm.

Mm-hmm.

Samar Shah (1:07:58)

Netflix is entering into this mobile gaming space as well as we talked about last time. So there's competition there, but yeah, they're under-invested in that space, in that portfolio. And then...

Ian Holloway (1:08:11)

especially

if it's going to be a big focus here moving forward.

Samar Shah (1:08:15)

That's right. Yeah, that's kind of what they've stated in their investor calls and materials. And then AR, VR, you know, I would have thought they would invest pretty heavily in there given HoloLens, but maybe that's not a big point of emphasis for them anymore.

Ian Holloway (1:08:32)

Well, this is still delayed data, right? It's still backwards looking. you know, potentially they could have had a big shift. Who knows, right?

Samar Shah (1:08:42)

Potentially, yeah. mean, if you were going to... Like to me, the most natural place for Game Pass is to really corner the AR, VR gaming market. 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 MetaQuest headset.

Ian Holloway (1:08:53)

Mm-hmm.

Samar Shah (1:09:09)

To me, that might have been the way to go, right? Now you are the software layer for all these different ways of consuming gaming media. And to me, the Game Pass and the ARVR are natural complements to each other, as opposed to being at odds with each other, like the gaming studios and Game Pass. So, you know, it's

Ian Holloway (1:09:17)

Mm-hmm.

Samar Shah (1:09:34)

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.

Ian Holloway (1:09:35)

Yeah.

And I think 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.

Samar Shah (1:09:55)

Yeah,

that's right.

Ian Holloway (1:09:59)

Next question for you. Does it cover competitive differentiation?

Samar Shah (1:10:05)

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? Like 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 kind of the big differentiator. Like the expensive Kinects, the expensive Blu-ray players.

Ian Holloway (1:10:23)

Mm-hmm.

Samar Shah (1:10:31)

The expense of all these things have not really moved the needle. It's all the other stuff. we gave them a C. This one was a tough one. Yeah, go ahead Ian.

Ian Holloway (1:10:44)

Yeah, I say there was a lot of debate over this one just in general. I'm going to echo that as well because 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.

Samar Shah (1:11:02)

Yeah, that's a tough one. But yeah, why don't we go to the next one, benchmarking it against competitors. Ian, what do you think? You looked at their portfolios in detail. Yeah, how would you rate them and why?

Ian Holloway (1:11:12)

Yeah.

So for this one, I gave them a C, and this one was kind of interesting for me because Microsoft doesn't file as much as Sony does, 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 our competitors or our other groups have some leftover to pursue other things, they seem to... Nintendo and Sony just seem better balanced overall in their portfolio, and Microsoft seemed a little bit more over-invested in some areas. So I gave them a C. It's hard to, I guess, compete against Nintendo when they're getting such a high allowance rate.

And you have to ask, why aren't you getting that as well? A little bit.

Samar Shah (1:12:13)

Yeah, I think that makes sense to me. The next two, does it exclude important competitors and does it align with forward-looking R &D spin? I would maybe flip-flop those grades. I think they probably do good job of excluding competitors, so maybe that ought to be a B. Microsoft hasn't asserted their patents against competitors, but I think they could. The quality of these patents, I thought, were pretty high. If they wanted to exclude Sony and sue Sony and make it...

Ian Holloway (1:12:23)

Mm-hmm.

Samar Shah (1:12:43)

harder for them to like 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. Can you add in practice exclude competitors? That's a tough one because how big these companies are. And because how good each other's patents qualities are. So maybe that's a B.

Ian Holloway (1:12:56)

Okay.

Samar Shah (1:13:08)

but I think does it align with forward-looking R &D spend? Maybe that's a C or a C-, right? Because sure, they have patents on these different divisions, but they're so overweight on the console market, and maybe that's going to be the least important business line for them, right? It seems like all the R &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 % of their portfolio? Yeah, 10 %? Very low. Yeah.

Ian Holloway (1:13:42)

10 % yet, yeah, yeah, it's low. ⁓ I'm sorry, including the game pass. Yeah, we're up to 30

% when we include that as well. So 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 jumping between A's to B's to C's and back again. Tomorrow we may feel even differently, who knows?

Samar Shah (1:13:50)

Yeah.

That's right.

Well, yeah, I think there are some things we can say is that they have done a good job on their patent portfolio. They have done a good job of mining patentable technology. It's just the business strategy is muddled and that has a knock-on effect on the patent strategy as well.

Ian Holloway (1:14:29)

Yeah, there's a downstream effect of, you know, if you've got a muddled business strategy, it makes sense that your IP strategy is a little muddled as well. our last question, does it anticipate potential horizontal or vertical integration in the industry?

Samar Shah (1:14:46)

Yeah, and that's, I don't think so. Just because like, you know, if I'm there, patent counsel, I'm getting the business people to think long and hard about what are the business models that we're going to 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. I mean, we see a lot of investment in the console business. We saw...

you know, some investment in the ARVR business, which doesn't seem like they're going to sell off at this stage. They've just closed that business unit down. But yeah, that's kind of tough. also, know, like Sony, we saw their hockey stick kind of a filing growth curve, right? And which I think makes sense, right? If you are anticipating a lot of litigation and integration happening,

Ian Holloway (1:15:23)

Mm-hmm.

Samar Shah (1:15:40)

You need to file more patents to carve out more spaces for yourself. Like your goal from, it goes from being defensive to being offensive on the patent portfolio. So right now, when you're in growing space, the model on the patent portfolio side is to initiate a detente of sorts, right? But when the pie starts shrinking...

Ian Holloway (1:15:44)

Okay.

Samar Shah (1:16:04)

you're going to have to start generating revenue from other places other than business, right? And that is through legal is 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. And if I need to, you know, spin up additional revenue, I could have some things to do it with. Whereas Microsoft is almost kind of ramping down its patent filing.

while Sony is ramping up its patent filing, right? So there's a pretty stark contrast there in terms of the approaches these two companies are taking. And that's something to think about. Although like 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 going to be overweight on your legal spend. So I see it both ways, but...

Ian Holloway (1:16:38)

Mm-hmm.

Samar Shah (1:16:59)

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 in

Ian Holloway (1:17:07)

So was going to ask,

does that ramping down indicate a strategy to you at all? Like something that we could make a conclusion about.

Samar Shah (1:17:18)

Yeah, I mean, we do see some ramp down in their console patent filings, right? So maybe, you know, like even though they're 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, you know, which is what keeps them from getting an F here probably, but we don't see, like we see a ramp up in their AR, VR filings, but that business unit is getting shut down. So that's confusing to me.

Ian Holloway (1:17:23)

Mm-hmm.

Samar Shah (1:17:50)

We see not a lot of growth in the streaming game pass filings. And that's curious to me if that's going to be your dominant business model going forward. That's interesting. Their gaming studio patents are flatlined as well. Like if that's going to be your dominant business model going forward, you'd want to see a ramp up there. I don't know. Like just don't see a...

Ian Holloway (1:18:00)

Mm-hmm.

Samar Shah (1:18:17)

cohesive patent strategy that anticipates these kind future events happening in the industry.

that which would be, you know, a potential consolidation of some sort or a write down of some sort.

Ian Holloway (1:18:32)

Alright. Well, any final thoughts you'd like to leave our listeners with?

Samar Shah (1:18:37)

Yeah, don't have, you know, just like the Microsoft strategy, I am just feeling as muddled. Hopefully our listeners are not. But yeah, this is a tough one. 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 really has sewn them in from, you know, doing experiments further. Like they have to kind of run it up the middle, so to speak, because...

Ian Holloway (1:18:44)

Hahaha

Mm-hmm.

Samar Shah (1:19:07)

you can't take a lot of risk anymore.

Ian Holloway (1:19:10)

makes lot of sense. They've put themselves in this position and they're continue on with it I guess. Well thanks Summer for sharing insights on this. I think this was worth the wait still.

Samar Shah (1:19:18)

Yes.

Yes, you too, Ian. This portfolio was not easy to parse and you did a great job. So I appreciate that. This is fun.

Ian Holloway (1:19:28)

Ha ha.

I had a great time as well.

Samar Shah (1:19:34)

Well,

thanks everyone for listening and we appreciate it and we'll see you on the next one.

Ian Holloway (1:19:40)

See you in the next one. Take care.