Was Fortnite just a fad? The game's decline might be hurting Microsoft's business


Microsoft impressed investors last week with solid numbers for its fourth quarter. Its revenue and adjusted earnings rose 12% and 21%, respectively, buoyed by the growth of its commercial cloud business, which grew its revenue 39% annually and accounted for nearly a third of its top line.

However, Microsoft’s gaming business was a soft spot in the earnings report. It posted a 10% annual decline in revenue and missed its own expectations. Xbox hardware sales plunged 48% annually, while sales of Xbox software and services – a bright spot in previous quarters – slid 3%.

Soft demand for Xbox consoles isn’t surprising since the Xbox One is nearly six years old and gamers anticipate new consoles next year. Soft sales of video games were also expected due to a lack of major game releases during the quarter. However, Microsoft also noted that it faced a “tough comparable” from lower sales of an unnamed third-party title.

Niko Partners analyst Daniel Ahmad claimed that title was Epic Games’ Fortnite and that gamers are spending significantly less cash in the free-to-play game. Let’s see how Fortnite’s decline is affecting Microsoft, and whether or not it will weigh down its gaming revenue in fiscal 2020.

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Are gamers losing interest in Fortnite?

Fortnite launched two years ago and is currently available on Windows, macOS, iOS, Android, the PS4, Xbox One, and the Nintendo Switch. The game has three main modes: a shooter-survival mode, a battle royale mode, and a creative mode for building worlds and battle arenas.

Fortnite generates revenue by selling V-bucks, an in-game currency that can be spent on cosmetic skins, dances, and pre-released game modes for certain characters. It generated $2.4 billion in revenue in 2018 according to SuperData, making it the year’s highest-grossing free-to-play game with over 200 million players worldwide.

But 2019 has been a much tougher year forFortnite. Revenue fell 48% month-over-month across all platforms in January, according to SuperData. The firm also recently claimed Fortnite generated $203 million in revenue in May, marking a 38% drop from a year earlier.

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Newzoo also recently reported that Fortnite continues to lose viewers on Twitch. As a result, Tencent’s Riot Games, the publisher of League of Legends, overtook Epic (which Tencent also holds a stake in) as the most-watched publisher on Twitch in the second quarter.

Newzoo still ranks Fortnite as the fifth most popular core PC game worldwide, but it clearly peaked as it faced tougher competition from similar games like Electronic Arts’ Apex Legends and Activision Blizzard’s Call of Duty: Black Ops 4. It also faces fierce competition on mobile devices from games like PUBG Mobile and NetEase’s Knives Out.

What does Fortnite’s decline mean for Microsoft?

Microsoft and other platform operators typically retain a cut (usually about 30%) of Fortnite’s revenue, with a few major exceptions.

Epic avoided paying Google that cut by directing Android users to download the app from its website instead of Google Play, and applied the same strategy on Windows and Mac by launching its Epic Games Store last December.

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Microsoft still controls its Xbox gaming ecosystem as a walled garden, so it’s likely still generating a full slice of Fortnite’s revenue on Xbox consoles. We can’t quantify the exact value of Fortnite for Microsoft without knowing the exact number of Fortnite gamers on Microsoft, their spending patterns, and its cut of the game’s revenue – but its earnings report and Ahmad’s comments indicate that the game’s decline was significant enough to dent Microsoft’s gaming business.

On the bright side, Microsoft noted that it partly offset its weaker software sales with higher sales of Xbox Live and Game Pass subscriptions, which indicates that its gaming ecosystem remains healthy.

The bottom line

We won’t know how much revenue Microsoft’s gaming unit generated in 2019 until it files its 10-K report (and releases it in early August), but it generated 9% of the tech giant’s revenue in 2018. The gaming business was weak over the past few quarters, but Microsoft easily offset that softness with the growth of its commercial cloud business – which is firing on all cylinders with the growth of Azure, Office 365, and Dynamics 365.

Microsoft expects the gaming business to warm up in the second half of fiscal 2020 as it works through the tough year-over-year comparisons. It also has several long-term catalysts on the horizon, including its new Xbox and xCloud cloud gaming service, which could both turn the gaming unit into a roaring growth engine again.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun owns shares of Tencent Holdings. The Motley Fool owns shares of and recommends Activision Blizzard, Alphabet (A shares), Alphabet (C shares), Microsoft, NetEase, and Tencent Holdings. The Motley Fool has the following options: long January 2021 $85 calls on Microsoft. The Motley Fool recommends Electronic Arts and Nintendo. The Motley Fool has a disclosure policy.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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  • To determine the deadliest cars in history, 24/7 Wall St. reviewed historical auto recalls and famously dangerous vehicles, as well as data from The National Highway Traffic Safety Administrationrsquo;s Fatality Analysis Reporting System and the a href= Institute for Highway Safety/a.1 of 17
  • strongFord Model T /strong(madenbsp;1908-1927):nbsp;The Ford Model T revolutionized the auto industry in many ways. It was the first car many Americans could afford, and it existed at a time when driving laws were just being written or were completely non-existent. Not to mention, the government was still a long way from establishing safety standards for automobiles. The Model T was released in 1908. That summer, 31 people were killed in auto accidents in Detroit alone. The cars were a fire hazard, as gas tanks were located underneath the seats, and their flat glass windshields were known to severely cut anyone ejected from the car in a crash. As recently as 2013, a woman in Utah died after the Model T she was riding in overturned.2 of 17
  • strongChevrolet Corvair/strong (madestrongnbsp;/strong1960-1969):nbsp;The Chevrolet Corvair was a popular car model until it developed a reputation as a death trap after a string of highly publicized accidents. In 1962, comedian Ernie Kovacs died after an accident in his Corvair. Three years later, Ralph Nader singled the vehicle out in his book quot;Unsafe at Any Speed,quot; which tackled the cars flawed handling. Chevrolet eventually admitted the Corvair was prone to fishtailing, particularly when driving fast, unless the back and front tires had a very different air pressures. General Motors was sued over 100 times for Corvair-related incidents.3 of 17
  • strongFord Pinto /strong(madenbsp;1971-1980):nbsp;The design flaws of the Ford Pinto eventually turned into a major scandal for Ford. The company knew the Pinto had a gas tank that was vulnerable to damage in collisions, causing leaks and leading to fires. It was also reported to shift gears on its own. Despite warnings from engineers, Ford decided it would be cheaper to pay for wrongful death lawsuits than install an $11 fix in each car. These flaws resulted in at least 51 deaths, though the true total may be higher. Ford faced reckless homicide charges, but it was acquitted in 1980.4 of 17
  • strongAudi 5000nbsp;/strong(madenbsp;1978-1986):nbsp;The major design flaw of the Audio 5000 led to sweeping changes in the auto industry. In the 1970s and 1980s, drivers reported over 1,600 incidents of 5000 models changing gears and speeding up by themselves, causing hundreds of accidents and several deaths. To prevent this phantom gear shift, Audis parent company Volkswagen added shift locks to all 5000 models ndash; a feature that is now required for all cars.5 of 17
  • strongFord Bronco IInbsp;/strong(made 1983-1990): The first ever SUV to hit the road, the Ford Bronco II became popular quickly. Like many SUVs to follow, it had a high risk of rolling over, even at speeds as low as 20 mph. The Insurance Institute for Highway Safety said it was among the quot;most deadlyquot; vehicles on the road. More than 800 people have reportedly died in Bronco II rollover incidents. Ford reportedly knew of these risks before launching the Bronco II, but it never recalled any of the cars, instead replacing them with the newer Ford Explorer in 1990.6 of 17
  • strongYugo GV /strong(made 1985-1992):nbsp;The Yugo GV was marketed as a light, cheap car to get people from A to B. It proved to be too light to protect drivers or passengers, as it offered almost no front-end crash protection. It still has one of the highest U.S. fatality rates of any car, with more than 3.6 occupant deaths per 10,000 GVs. These issues were pushed into the spotlight when a GV was reportedly blown off a bridge by a gust of wind, sending a driver plummeting to her death.7 of 17
  • strongSuzuki Samurai/strongnbsp;(made 1985-1995):nbsp;Like other early SUVs, the Suzuki Samurai turned out to be much too top heavy to be safe. Consumer Reports published the results of a test that showed the vehicles were prone to tipping over. Suzuki initially pushed back against those reports, but after thousands of accounts of rollovers, the company finally acknowledged that more than 200 people died and over 8,000 were injured as a result of Samurais flipping.8 of 17
  • strongFord Explorer/strong (made 1990- present):nbsp;The Ford Explorer was created as a replacement for the top-heavy and roll-prone Bronco II. But it ended up having many of the same issues as its predecessor. Explorer rollover incidents led to hundreds of deaths and congressional inquiries into Fords safety issues. In the hearings, Ford pointed the finger at the Firestone tires the Explorers were equipped with and severed its business relationship with the tire supplier. Congress ultimately sided with Ford, as Explorers were similar in design to other SUVs that did not have the same rollover problems. All in all, these issues led to an estimated 330 deaths.9 of 17
  • strongFord Crown Victoria Police Interceptor /strong(madenbsp;1992-2011):nbsp;Police face a dangerous work environment every day, but it used to be even more perilous when the model cruiser was a Ford Crown Victoria Police Interceptor, which had a dangerous flaw. For decades, Crown Vics were produced with gas tanks behind their rear axles ndash; a position that makes them prone to puncture in rear-end collisions, leading to gas leaks and fires. Ford introduced a fix in 2005, but critics say it has not helped in more severe incidents.10 of 17
  • strongChevrolet Cobalt /strong(made 2005-2010):nbsp;The Chevy Cobalt was beset with a number of dangerous problems until it was discontinued in North America in 2010. Faulty ignition switches caused some vehicles to stall, leading to well over 100 deaths in a number of GM cars, most notably the Cobalt. GM paid $2.5 billion in settlement and penalties over the scandal ndash; plus a $35 million fine for delaying the recalls. Tens of thousands of Cobalts were also recalled in 2012 in warmer states after a plastic part connected to the fuel pump was shown to be prone to cracks and leaks.11 of 17
  • strongToyota Yaris /strong(madenbsp;2007-2018):nbsp;In addition to a critical design flaws, the Toyota Yaris proved to be too small to be safe. From 2009 to 2011, Yaris drivers and passengers were more likely to file personal injury claims after an accident than those in any other car as the tiny hatchback provided little protection. The Yaris suffered from the same issues as several other Toyota vehicles, including a wiring problem that stopped airbags from working, and a defect that caused the front seats to move without warning.12 of 17
  • strongGMC Terrain /strong(madenbsp;2010-present):nbsp;When reviewing the data from 2012 to 2015, the GMC Terrain 2-wheel drive was by far the deadliest SUV on the road, according to IIHS. The Terrain 2WD had a death rate of 53 deaths per million registered vehicle years, as compared with the average rate across all vehicles of 30 deaths per million. It ranked among the worst SUVs for single-vehicle, multi-vehicle, and rollover crash death rates.13 of 17
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  • strongChevrolet Corvette /strong(madestrongnbsp;/strong1992-present):nbsp;The Chevrolet Corvette Corvette had a fatal accident rate of 9.8 cars per billion miles, the second-highest rate among recent model year vehicles, iSeeCars found. Studies have found that wealthier people in more expensive cars tend to drive rudely and recklessly. Considering the Corvettes high price tag, owners are likely to be wealthy and drive more recklessly.15 of 17
  • strongKia Rio sedan /strong(madenbsp;2001-present):nbsp;No modern car is more dangerous in a multi-vehicle accident than the Kia Rio. The IIHS found that, from 2012 to 2015, the Rio had a rate of 80 deaths in multi-vehicle wrecks per million vehicle years ndash; more than four times the average rate of all passenger vehicles, which is 18 per million. More recent versions of the Rio have improved their crash preparedness.16 of 17
  • strongHyundai Accent /strong(made 1995-present): No modern car is more dangerous in a multi-vehicle accident than the Kia Rio. The IIHS found that, from 2012 to 2015, the Rio had a rate of 80 deaths in multi-vehicle wrecks per million vehicle years ndash; more than four times the average rate of all passenger vehicles, which is 18 per million. More recent versions of the Rio have improved their crash preparedness.17 of 17

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