Can Xbox Get Back in the Game?

[MUSIC] When most people think of Microsoft, they think of spreadsheets and PowerPoints. >> Obviously, Microsoft is always dominated in the office. Of course, you use their spreadsheets and their email at work, but it wasn't a brand that really meant anything to consumers. >> That's our colleague Ben Fritz. He says that as far back as the '90s, Microsoft had aspirations to expand beyond computers and cubicles. Microsoft's bet was that they could build a very strong consumer brand that would give them a presence in people's living rooms and make them relevant to especially young consumers. >> You may have been wondering what this great device was here. >> In 2001, Founder Bill Gates took the stage at a conference in Las Vegas. He was there to show off the tech giants new attempt to break into entertainment. >> For the first time, let me now unveil Xbox. [APPLAUSE] The Xbox. [MUSIC] >> I'm thinking back to the 2000s, when there were all sorts of consoles on the markets, you had weaves, you had game cubes, and each of those systems had a certain reputation. What would you say was Xbox's vibe? >> Xbox's vibe was really for the hardcore gamers. The Nintendo Wii was for casual players. Grandparents played it together. I'm like, we bowling and stuff, you know? Anybody could do it. The Xbox was for the people who liked to play online, to play shooting games, where they try to kill each other, racing games. >> Xbox became a leader in multiplayer games, ushering in a whole new era in gaming. And for a while, the Xbox succeeded in giving Microsoft its cool factor. But those glory days have come and gone. And now Xbox has become a drag on the business. Xbox's business is in bad shape. Start of this year, their profit margin was down around 3%, which basically means that Microsoft could have put its money into a savings account, and probably made as much a bore. [MUSIC] And now they're in the midst of a major reversal of strategy under a new leader. She's told her employees, she's told gamers what rough shape they're in, and how she intends to fix it. >> At a high level, what does she want to do at Xbox? Like what's her goal? >> Her goal at the highest level is to get this business back in growth mode and to have it be a respectable part of Microsoft's business and not be sort of like the stepcate in the basement. [MUSIC] >> Welcome to the journal, our show about money, business, and power. I'm Imani Moise. It's Friday, October 9th. [MUSIC] Coming up on the show, can Xbox get back in the game? [MUSIC] Xbox used to be the it console for serious gamers. [MUSIC] >> This was back in the mid 2000s, when Lincoln Park was on the charts, and monster energy drinks were flying off the shelves. And in basements around the country, teenagers were huddled around that big, chunky black box with the bright green logo and the wired see-through controllers. >> Well, I think of Xbox as having this great legacy of big games like Halo. >> Thought I'd try shooting my way out. >> Mixed things up a little. >> And Gears of War. >> Don't move. >> What was that? >> A berserker. [MUSIC] >> Do I identify as a gamer? >> I identify as a lapsed gamer, as I've become a parent. I have a lot less time for it. I generously watch my son play games, but I don't play as much as I used to. >> Do you remember what your go-to game was? >> I used to play Gears of War every Thursday night with a group of friends. It's like an online shooting game where you also have chain saws. You can shop people in half. It was very violent, I'll admit, but we used to talk while we were doing it. It was a really big part of my social life when I was a young adult. [MUSIC] >> As Xbox made its rise, so did a Microsoft employee named Phil Spencer. He started out as an intern in the '80s, and over the decades, he worked his way up. By 2014, he was running Xbox. >> He was really a gamer's executive. He loved to play games. He knew how to speak to gamers. He was famous for playing video games during meetings with other executives. He really played this stuff. >> Playing games during meetings, are we talking about was he distracted or was it kind of like a demo? >> No, he was distracted, I mean, I'm sure he was glad I want to speak for him. Perhaps he could claim it helped his attention. He never know, but yes, I've spoken to people who work at Microsoft and said, yeah, he would have a game going on in the background. It's sort of be looking back and forth, or maybe pause the game to talk and then go back into it. This was a guy who loved video games. >> Around the time Spencer took over, the Xbox console wasn't doing as well as the company hoped. It was falling behind competitors like Sony's PlayStation. But Spencer's vision for the future of gaming had less to do with consoles. Instead, the company began working on a streaming service for video games. And in 2017, Xbox launched Game Pass. >> Game Pass is like Netflix. You pay a monthly fee and you have access to a library of games that you can play. But of course, if you stop paying, you don't have the games anymore. So it's traditionally people would buy a game and then they'd own it forever. Now, you're renting them and you have access to a huge library, but you have to keep paying the monthly fee. >> It sounds like a huge pivot for the company, for gamers and consumers. What's the strategy here? >> I think they thought that consumer behavior was switching towards subscription in all sorts of media. I mean, it made some sense, right? It happened in music, it happened in video. Why wouldn't it happen in games? And if they built the biggest and best service, they thought they would have enough scale to dominate the industry, right? That's what Netflix did. They invested a ton of money in original shows and movies and buying libraries, right? They were just building their audience, becoming number one and now they are number one. So I think Phil Spencer thought that strategy would work for them as well. >> Game Pass launched for $10 a month and it was a way to attract a wider audience, beyond just a hardcore gamers. >> Game Pass is an interesting way for us to introduce these games to a new audience who doesn't have the disk anymore. Doesn't know how to buy them. Did you have never heard of this game? >> People could access Game Pass on nearly any device. An iPad, a laptop, a smart TV. >> Early on, people were signing up for Game Pass. The service became especially popular during the pandemic. And Xbox wanted to keep the momentum going. >> Initially, the Game Pass strategy was just games. Just put up games, as many games as you can do. Xbox had also started acquiring game studios. By far, the biggest deal was for Activision Blizzard, which makes big-name games like World of Warcraft, Call of Duty. And for mobile gamers like me, Candy Crush. That one deal alone was valued at nearly $70 billion. Now, in addition to making money from selling consoles, Xbox was focusing on revenue from Game Pass subscriptions and they could license games if you played on other consoles like PlayStation. With the Game Pass library getting bigger and bigger, Xbox made another move to try bringing in subscribers. And it was a big gamble. >> One of the big things you did is they started putting some of their highest profile games on Game Pass day-to-day, meaning the same day that it went on sale, you could play it on Game Pass. >> In late 2024, Spencer did this with a highly anticipated new game release. >> Call of Duty Black Ops 6, like any new Call of Duty game, it's a huge deal for hardcore gamers. >> Guys, big news, the Black Ops 6 just got announced, guys. It will be coming on October 25th. >> Tomorrow, Black Ops 6 comes out and I am very, very excited for it. >> There's a new Call of Duty sequel every year and people can't wait for it to come and they play it like mad. And people, especially young people, often save up for it because they're used to spending up to 70 bucks to buy it. So if you're playing on Game Pass, that's a great deal. With the equivalent of a new Avengers movie being available in Disney Plus, the same day as in theaters. >> But there's a reason big budget movies don't go straight to streaming on day one. The studios need to bring in the revenue they get from ticket sales to turn a profit. It works the same way for blockbuster video games like Call of Duty. >> The biggest video games at this point, in the industry they call them AAA games, cost hundreds of millions of dollars. They take years to make. There are hundreds of not thousands of people involved in making them. So it costs a lot of money in both labor and technology to get these games made to make sure they work flawlessly. And get them out often on a very aggressive schedule. So that was really a big bet by Microsoft that they would bring in so many people to Game Pass that it would make up for all the lost sales that they were going to have. >> In the end, Black Ops 6 did bring in a record number of new subscribers. But that ate into sales of the game itself. Outside of Game Pass, the physical disc costs $70. The economics of it just didn't work, and all the sales they lost out on were not made up for by all the new Game Pass subscribers. So as the math was breaking down, how did Xbox respond? Well, at first, Xbox raised the price, so the price of the Game Pass subscription went up to $30, which per month, which for gamers, especially young gamers, was a lot of money. That higher price turned off a lot of customers. And just like that, the only good thing about Xbox is ruined. Goodbye to the Game Pass. $30 plus tax, but that's just too damn much for Game Pass, bro. Xbox also made changes to the subscription tiers, making the most desirable games only available to the highest paying subscribers. I think the other problem they face is that people would sign up to play Call of Duty, and then when they finish, they would cancel, right? The same thing as like somebody signs up for Netflix just to watch Stranger Things on this over the cancel. Over time, subscription started to dip. For this year, Microsoft had projected that Game Pass would have 77 million subscribers. But according to Ben's reporting, the actual number was way lower, more like 30 million. So that's less than half of what they were projecting, less than half of what they were betting on with all their big investments. And most of those subscribers are on console where they really fell short was getting people who played games on tablets and phones to sign up for Game Pass. As people, it turned out, we're not willing to spend $30 or even $20 a month for a subscription library of games. So can you just walk us through what shape is Xbox's business in by the start of this year? I mean, their profit margins have been in the low single digits recently. It's revenue. It's declining, which is obviously a very bad sign, especially when you're part of a video game industry that overall is growing. They sort of knew that Game Pass wasn't working and it really felt like they were going in the wrong direction they needed a big turnaround. Recently, Xbox has started working on a new console, something that for years took a backseat to Game Pass. Inside the company, it's called Project Helix. And earlier this year, there was another big change. Bill Spencer, who'd run Xbox for a long time, he left someone unexpectedly and the big surprise was who replaced him. A Microsoft executive named Asha Sharma, she's 38 years old. She definitely has a strong background in consumer technology, but she has zero background in video games. By her own admission, she never really played them before. Why would Microsoft hire an outsider, a total noob? That's next. In August, Ben went up to Microsoft's headquarters outside Seattle to meet Asha Sharma. She has a bunch of gaming paraphernalia, Xbox controllers, etc. behind her in her office. She has a bunch of fan mail on her desk when you run a company like Xbox, a lot of gamers right to you. That's at least two wedding invitations from gamers who asked her to come to their weddings. And when we spoke, I would say she's very precise in the way she talks. And she doesn't talk casually about video games or video gamers. She's not part of that culture at all. She's really part of the Silicon Valley consumer tech culture. Her background is a company like Meta and Instacart. Before this role, Sharma oversaw Division at Microsoft that was building AI tools for businesses. She was one of the company's few rising leaders that had experience running a consumer business. But with no prior gaming experience, even she was surprised when the CEO tapped her to take over Xbox. How did the Xbox community react to this choice? She's been a poll rising figure in the game community for sure. Gamers are extremely opinionated and people at first were like, who is this outsider coming in? She's not one of us. She doesn't understand the games. A lot of people have kind of haters. They've said terrible things about her online. She said she's a devil. She's ruining video games. But of course, I think she's come in. She's been very, very honest about what's wrong with the business and what needs to be fixed. And people have known that the game past strategy wasn't working. And they sort of felt that this brand was in decline. So some people are excited to say, hey, there's a real effort to turn things around. And there's some energy behind Xbox again for the first time in a while. I mean, clearly she's won some fans if she's getting wedding invitations. Yeah, exactly. Sharma's made some changes that have gone well with Gamers, like removing an unpopular AI feature. But ultimately, her goal is to get Xbox back into growth mode, to be taken more seriously as part of Microsoft's business. To do that, Sharma is unwinding major aspects of her predecessor Phil Spencer's vision. The company over-invested. It bought too many studios and it hired too many people, especially during the pandemic craze when everybody was at home playing games non-stop. In July, the company announced a huge layoff. It said that it's letting go of 3,200 Xbox employees. Which is about 20% of the workforce. That's a huge number. She said, I want everybody to know. I don't want people to feel like they have no idea how many layers are going to be. She's been very clear, these are the layoffs that we need, and once we get past them, we'll be on solid footing and we'll be pursuing this strategy that will turn the company around hopefully. And she's also started selling or spinning off some of the gaming studios that were acquired under Spencer. She's cutting back on the number of games that Microsoft makes, and she's investing more money into such a handful of big franchises. And her bet is that Microsoft doesn't really have an advantage in making mid-budget or low-budget games and what she wants to do is invest her money in the big franchise titles that nobody else can make. That are big IP that's meaningful to gamers. So these are titles like Halo, like Minecraft, like Fallout. But with Game Pass specifically, what's her plan to fix it? So she actually cut the price to try to make it more appealing to gamers. I think she knew the $30 price was turning off people and she really needed to earn some good will with gamers. But on the flip side, she's cutting back the content. Most specifically, the next call of duty sequel is not going to be available day and day on Game Pass. If you want to play it when it comes out, you're going to have to pay 70 bucks for it. If you want to play on Game Pass, you're going to have to wait at least a few months, which is sort of the model we're used to with movies, right? If you want to watch a new movie, you've got to go pay for it in the theater. If you want to watch on the streaming, okay, you have to wait several months to watch it at home. So she's taking the same approach with big budget games. What's going to be left on Game Pass? Well, Game Pass is going to have these big franchise titles that we've talked about. They're not going to be available day one when the new one comes out. But within a few months, they will be and there's a huge library of stuff, right? There's tons of call of duty games from the past, there's tons of Fallout games. And they'll have a collection of titles from other companies that they, you know, that they lease. It's just a much smaller offering for a smaller cadre of gamers, I would say. Sharma's first big test of whether gamers will go for this is coming at the end of this month with the release of that upcoming call of duty game. Game Pass subscribers of any tier will have to wait a year before the game shows up on the service or customers can buy it for $70 and play it right away. So can they sell enough copies? And they sort of get gamers to revert back to their old behavior of buying call of duty sequels in order to make the economics work or have people just sort of gotten used to being like, I'll wait, it'll be on Game Pass eventually. I'll wait or I kind of stoward on call of duty because of this whole Game Pass back and forced strategy over the past few years. Not to mention the money. There's one other big problem, one big challenge, I'll say for us, Sharma, which is that there's also a new grand theft auto game coming out next month, which is sucking all the oxygen out of the room, so to speak, for any other game trying to compete. So looking ahead, how much of Xbox's success will be based on its console versus Game Pass? I think if you speak to Oshar and her executives, they would say it's really a balance now. It's a balance between Game Pass. It's a balance between the big new titles that they sell as a balance between the console. I think Microsoft, until recently, was sort of betting the farm on Game Pass, and I think they would say now that they over-indexed towards Game Pass and they under-invested in their big franchise titles and in their hardware, and right now it's much more of a three-legged stool. Is it also kind of a full circle moment getting back to their roots? Yeah, I think the way that Xbox succeeded originally was by having great hardware with great games for hardcore gamers, and Game Pass really tried to turn it into a service for anyone on any device, any kind of gamer, and they are getting back to the roots and saying, we need to satisfy these hardcore gamers first and foremost, and then we certainly can and we'll try to expand beyond that, but we can't abandon them. That's all for today, Friday, October 9th. The journal is a co-production of Spotify and The Wall Street Journal. The show is made by Catherine Brute. Rueur, Evelyn Fajardo Alvarez, Pia Gadkari, Max Green, Ryan Knoopson, Sophie Kodner, Matt Kwong, Colin McNulty, Jessica Mendoza, Laura Morris, Enrique Perez de La Rosa, Sarah Platt, Alan Rodriguez Esbanoza, Heather Rogers, Katie Shepard, Pierre Singy, Jibica Verma, Tatiana Zemese, and me, Imani Moiz. Our engineers are Griffin Tanner, Nathan Singapok, and Peter Leonard, with help this week from Sam Bear. Our theme music is by So Wiley. Additional music this week from Catherine Anderson, Marcus Bagala, Peter Leonard, Bobby Lord, Emma Munger, Nathan Singapok, Griffin Tanner, So Wiley, and Blue Dot Sessions. Back checking this week by Nicole Pasalca. We've got the next episode of My Monday Morning coming out this weekend, featuring the composer behind the biggest movie this summer, The Odyssey. Check it out in the feed on Sunday. The journal will be back with a new episode on Tuesday. Thanks for listening, and see you then.