The recent controversy surrounding Redfall and the CMA blocking the Activision acquisition brought up a lot of questions about Xbox and its leadership under Phil Spencer. Some questioned the state of Xbox’s management under his tenure. While others outright have called for his head on the chopping block. No doubt these questions have led to interesting conversations across the internet about the state of Xbox, its leadership, and its future. Despite the setbacks, Phil is doing an incredible job leading Xbox in an ever-changing video game landscape. However, there are some considerations that are often missing from the conversation that are worth discussing.
Phil Spencer Saved the Xbox Division and Gets a Seat at the Table
When Satya Nadella took over as Microsoft CEO in 2014, he was known as the cloud guy. He was pivotal in shifting Microsoft towards its cloud infrastructure, Azure. So, when he sat down with Phil Spencer to get a feel for what Xbox is and how it fits into the Microsoft corporate structure, the meeting could have brought about a different fate for the Xbox division.
Murmurs arose that the Xbox division might have been spun off entirely. Instead, Phil managed to align Xbox with Microsoft’s greater cloud-oriented/services vision. In 2017, he was promoted to the role of Executive Vice President of Gaming and got a seat on the Senior Leadership Team at Microsoft, reporting directly to Nadella. And I’m sure the job description did not include “to save Xbox and guide it to dominance once again”. Instead, Phil Spencer successfully aligned the Xbox division with the overall corporate strategy and trajectory of Microsoft. In other words, he made Xbox a core pillar of Microsoft for the foreseeable future.
Phil Spencer Goes to Work
Despite social media doom and gloomers, Xbox has never been as profitable since Phil has taken the reins. From 2017 to 2022, Microsoft’s gaming revenues increased from $9.05 billion to $16.23 billion, accumulating over 120 million monthly active users across console, PC, and mobile platforms in the process.
Xbox has expanded its repertoire of studios increasing from 4 studios to 23 studios as of 2022. That’s not including the studios under Activision Blizzard King if the deal goes through that is.
Xbox Game Pass was introduced in 2017 and disrupted the industry. Estimates put Xbox Game Pass subscribers at around 25 million users. The service has well over 300 titles at any given time and caters to all types of gaming tastes and preferences. Despite a slow Q1 in 2023, which saw hardware revenue decrease by a whopping 30%, Xbox content and services managed to increase slightly by 3% year-over-year (almost $1 billion from gaming subscriptions alone) despite a slow year in 2022 Xbox first-party game releases.
Xbox was also Metacritic’s publisher of the year in 2022 for notable 2021 releases such as Halo Infinite, Age of Empires IV, Forza Horizon 5, Psychonauts 2, and Microsoft Flight Simulator averaging an 87.4 Metascore. Now some of these titles might not be the “bangers” that some like to talk about on Twitter. But titles like MSFS and Age of Empires IV are known to have extremely long legs. These titles are great at servicing their enthusiast fanbase for years that might not be a vocal presence on social media platforms. In particular, Flight Simulator has an active mod community that has set up an impressive, albeit pricey, mod shop where players can purchase all sorts of user-generated content, a system similar to Roblox (which is valued at $21.4 billion by the way!).
Old Metrics Dont Paint the Full Picture
Gaming as an industry has shifted a lot in the past decade. People consume games differently from previous generations. Unit sales are not as indicative as they once were. Games now have marketplaces that sell additional services and goods such as DLC, battle passes, in-game currencies, and cosmetics. The biggest games in the industry are free such as Fortnite, Counter-Srike Global Offensive, League of Legends, Robolox, Minecraft, and Call of Duty Warzone.
Platform holders like PlayStation, Xbox, and Steam are given a cut (usually around 30%) of any transaction on the platform, including microtransactions. That is one argument Sony has made against the pending Microsoft acquisition of Activision Blizzard King. Sony reiterated that it depended on funds raised from microtransactions from games like Call of Duty to fund its first-party game development.
The same applies to consoles as well. Hardware is now an entry point to a larger digital market. Yes, the more hardware you sell the more customers you can potentially serve. But what if you deliver the marketplace without a proprietary console? What if your customers can reach your marketplace via any PC, mobile device, or smart TV? That too could also increase your player base.
The “Big Three” Don’t Reflect the Video Game Landscape Anymore
Most console warriors on Twitter will be quick to point out that Sony is number 1 in the gaming space and there are only 3 major competitors. That is not the case. By far, Tencent is the largest video game company by revenue. In Q3 2022, the Chinese giant brought in $8.3 billion in revenue, while Sony is a distant 2nd with its revenues reaching $4.24 billion, and Apple is in 3rd with $3.64 billion. Microsoft and Nintendo were ranked 4th ($2.9 billion) and 8th ($1.89 billion) respectively.
All this is on the back of Tencent’s limited presence in the home console space. A vast majority of its IPs are free-to-play titles such as League of Legends, and Valorant. Tencent also has a slew of strategic investments in notable publishers/studios such as 40% of Epic Games (Fortnite), 84.3% of mobile giant Supercell (Clash of Clans, Clash Royale), 11.5% of Bluehole (PUBG), 80% of Grinding Gears Games (Path of Exile) among others.
Last year in 2022, Tencent upped its stake in Ubisoft to 11%, and the Chinese conglomerate also invested in Digital Extremes, the developer of Warframe. Tencent does not sell boxed games, its entire business strategy is primarily focused on live-service games that are primarily played on PC and mobile space.
Apple has cemented itself in gaming thanks to its Apple Arcade subscription service which launched in 2018. Estimates indicated that in 2019, Apple Arade brought in $1.9 billion. Services and subscriptions (which includes Apple Music) are considered a growth segment for the tech giant and are projected to reach $8.2 billion by 2025.
Being platform agnostic has served companies like Tencent well. Their primary focus is engagement because it is engagement that is likely to turn free-playing players into customers for digital services and goods. Phil Spencer and his team are cognizant of this and wanted to position Xbox as entering a whole new landscape where traditional metrics and practices were quickly being swept away by emerging trends and norms.
The industry as a whole is quickly shifting towards long-term live service or games as a service model while AA and indie game releases fill the remaining games market. Part of this reason is as AAA video game development costs have soared and games are taking longer than ever to ship, generating recurring revenue streams is a way to offsets these costs and risks. Especially since $70 games reduced overall game sales. Add the fact that the home video game console market is plateauing so new avenues of growth have to be pursued.
The home video game console market remained somewhat static at around 270-290 million home consoles since the seventh (PlayStation 3, Xbox 360, Nintendo Wii) and eighth (PlayStation 4, Xbox One, Nintendo WiiU) generations. This is why Sony is shipping its exclusive titles to PC and is betting big on live service games.
PlayStation is slated to release 12 live service games and this does not include their acquisition of Bungie. One of those titles, Babylon’s Fall, has already closed down its server in February 2023. This goes to show that live-service games are not an easy nut to crack.
The Video Game Industry has Always Been Dynamic
People seem to forget that Nintendo altered the way it competes. It pivoted and carved its own unique place in the video game industry. Despite having a strong offering of titles, including the seminal Breath of the Wild, the Wii U ultimately failed. Besides the confusing naming convention, it wasn’t clear whether the Wii U was a dedicated home console or portable. That confused customers and cemented the ill fate of the Wii U, despite having a stellar offering of games like Mario Kart 8, and The Legend of Zelda: Breath of the Wild.
Things had to change if Nintendo. Before the Nintendo Switch, Nintendo always had a dedicated home console and a handheld console. The Switch represents the first consolidation of the two. It was a gamble, but it paid dividends because it offered hybrid usage with clear messaging that consumers could understand. Now, the Nintendo Switch is the third-highest console sold ever with over 122 million units.
Similar to Nintendo, Xbox has moved beyond the traditional home console space. Both are competing on their own metrics. Now every major first-party game is released concurrently on PC. This includes shipping Xbox titles on the Microsoft Store, Steam, and the Epic Games Store as well. Xbox, similar to Tencent and other tech giants, looks at monthly active users where player engagement is the most important Key Performance Indicator. That is become active users are more than likely to make more purchases in their digital storefronts. Add to that active users continue to engage in the ecosystem.
Key Takeaways from the Kinda Funny Interview
Let’s not beat around the bush, Phil Spencer did look aggravated during the Kinda Funny interview. His frustration with letting down Xbox customers was as clear as day. Although some doom and gloomers were dissecting his comments within the context of social media console-warring narratives, there is more to his words than they appear.
The statement above might appear defeatist in nature, but it is an admission of several factors. First, it suggests that people are already locked into their preferred ecosystems. Second, it suggests that like Nintendo before it, Microsoft is competing on different terms.
Now, its focus is on engagement, and it is trying to take on the biggest player in the video game space, Tencent. To achieve this they have to look beyond the dedicated hardware and bring their goods and services directly to customers.
The same approach was taken in Microsoft Office where before the software was only available on Windows PCs. Now, it’s everywhere and even become a subscription service via Microsoft 365.
Xbox is looking beyond the static console space, instead opting to bring its ecosystem to multiple platforms. PC is an area of growth it is targeting. That is why there’s a heavy push there and it’s creating unique offerings on the PC platforms. This includes the recent Riot Games PC Game Pass deal. The deal unlocks a variety of perks like access to all in-game characters and more. However, some console warriors on Twitter felt that they were left out and voiced concerns on the faltering social media platform. That is something Xbox needs to address and ensure their customers feel their needs are serviced.
The Phil Spencer Era Shifting Into Overdrive
During the interview, Phil stressed an important point that seems to have gone over the heads of pundits.
When I look forward over the next quarters, which has always been my focus, is how do we get a big game out every quarter at quality? Things are lining up, finally! After the slow down by COVID… But I can see now we got games coming every quarter that can surprise and delight our customers.
Yes, it has been a meme within the gaming social media communities of “wait ‘til next year” or “wait ‘til next E3 (RIP)”. Phil’s tone and body language suggest that a hit title released every quarter is on the precipice. But for me, it had already started.
The overdrive has begun. The release of Hi-Fi Rush in January marks the beginning of this release cadence. Redfall was the second title in the line. Though it didn’t exactly meet critical acclaim, despite seeing some engagement success. Redfall seems to be a symptom of Zenimax’s final push for service-based games before being acquired by Microsoft. Hopefully, it will be the last and the studios can move on to developing games they are passionate about.
Starfield and Forza Motorsport are slated to release this year as well. And who knows what’s going to be announced during this year’s Xbox showcase. Then there’s Hellbalde 2, Avowed, Perfect Dark, Contraband, Outer Worlds 2, and a plethora of other titles that are in the pipeline. That doesn’t include other third-party releases in Game Pass. All of these titles are varied and diverse and are intended to feed Game Pass content to keep its users subscribed. This is essential when you want to cater to as many gamers as possible. Sticking to “safe” choices will diminish the broader appeal and pigeonhole creativity. That is something Phil Spencer and his team intimately understand.
Turning the Ship
Phil Spencer has done a tremendous job at saving the Xbox brand and aligning it with Microsoft’s corporate strategy. I do feel that his transparency and openness to interacting with the media and fans is a double-edged sword. It’s great that people can have high-level access to a senior leader at Microsoft. But at the same time, if any issue occurs, it is highly magnified and perpetuated across gaming media.
There are still questions about the management of certain studios under Xbox, and that criticism is valid and warranted. It does seem that Phil is aware of these issues and is trying to rectify them. It’s also important that note that Microsoft is a massive corporation with over 200,000 employees. So there is probably a lot of bureaucratic tape to go through to implement any significant administrative/management changes.
To add, the nature of game development is a lot more complicated and nuanced compared to previous years. That is why games are taking longer to release and when they do ship, they are often riddled with bugs. Seldom do gamers see a game release without a hitch, though some titles like Dead Island 2, are surprising exceptions.
The Phil Spencer Era is More than the Last Reviewed Game
No, I don’t expect Phil Spencer to lose his job any time soon. Especially over one game getting a less-than-favorable review. He’s been growing Xbox despite the challenges the brand has faced. He has come to the realization that “bangers” alone will not grow Xbox. It will take radical pivots, and those seeds have already been planted, and the harvest is right around the corner.