Xbox Crisis: Microsoft’s Battle to Save or Scrap the Console

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Today, we’re talking about the future of Xbox. Phil Spencer, a two-time Decoder guest who’s led Xbox for more than a decade, is stepping down. But in a shocking twist, his deputy and long-assumed successor, Sarah Bond, is also out too, and the Xbox division is now in the hands of Asha Sharma, one of Microsoft’s AI executives with no prior game industry experience. It’s a major leadership transition that suggests Microsoft wants to make serious changes to its gaming division, which owns franchises like Halo, Call of Duty, and Minecraft.

There is no better person to talk to about all of this than Tom Warren, a senior editor here at The Verge and author of the excellent Notepad newsletter. Tom is actually on parental leave right now, but Microsoft has a longstanding habit of disrupting his well-earned time off with major news. So, Tom was gracious enough to come on the show after he published a major scoop about what exactly went down at Xbox this past week.

There is a lot to say about Xbox: The story of the console and Microsoft Gaming is a complicated one, with a lot of twists and turns since it made its big splash in the video game industry 25 years ago. Yet for a majority of that time, it’s been stuck in third place, behind Nintendo and PlayStation. That’s a surprising thing to say for a division of a company worth trillions of dollars that also owns some of the most celebrated gaming properties in all of entertainment.

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So Phil Spencer, who started at Microsoft in the late 1980s and took charge of Xbox in 2014, was given the job of trying to turn the division around. Since then, Spencer has tried numerous moves: the Netflix-style Game Pass subscription service; a major push into cloud gaming; buying Activision Blizzard King, the maker of Warcraft and Candy Crush; and many, many different iterations of Xbox hardware. As of last year, there are even plans to bring Halo to PlayStation — something game industry insiders thought was basically impossible just five years ago.

But as you’ll hear Tom explain, the game industry has been changing faster than Xbox has been able to transform itself, and almost none of Spencer’s strategies have really clicked. Xbox is still far behind Nintendo and PlayStation, and on PC, it still stands in the shadow of Valve, which runs the dominant Steam store and now makes the Steam Deck handheld. Microsoft has spent tens of billions of dollars trying to acquire its way to a stronger position against the rise of Fortnite and Roblox, mobile giants like Tencent, and a zero-sum war for attention dominated by apps like YouTube, Instagram, and TikTok. And yet the company has very little to show for all of that.

Today, Spencer’s grand vision of 100 million Game Pass subscribers streaming Xbox games to whatever screen they want using the cloud still feels out of reach. But, as Tom says, it’s not lost forever — Xbox is far from dead, and there is still hope yet that new leadership can take some big swings and make something happen again.

Okay: Verge senior reporter Tom Warren on the future of Xbox. Here we go.

This interview has been lightly edited for length and clarity.

Tom Warren, you’re a senior reporter at The Verge. You’re currently out on paternity leave, but Microsoft just brought you back.

Yep. This happens every time I take a vacation or leave. Microsoft decides, “We’re going to do something massive and ruin Tom’s life.”

Just punishment for all of the scoops you’ve dropped on this company over the years. So this week, as you were playing with your beautiful new baby, Microsoft initiated a major shakeup at Xbox, something we’ve seen coming for a little bit, but maybe not on this scale or this magnitude. Describe what happened at Xbox this week.

Phil Spencer, the longtime CEO of Microsoft Gaming, technically, but Xbox chief is what he’s known as, is retiring, so he is leaving Microsoft. Sarah Bond, the Xbox president, is also leaving Microsoft, and then they’re actually promoting Asha Sharma, from the CoreAI side of Microsoft, to the CEO of Microsoft Gaming.

So she’s replacing Phil Spencer, essentially. So it’s big news, a big shakeup, should we say, of Xbox. I think with Phil Spencer, it’s been a long time coming, right? I think Xbox fans have expected that retirement, but perhaps not so much Sarah Bond’s leaving.

And this is, I think, the shakeup, right? We knew Phil was going to retire. He’d been messaging that for some time. He’s been there for a long time. He’s a Microsoft lifer, really. Phil has appeared on the show before, and we will be showcasing some clips from his previous interviews on Decoder to get your perspective on the changes that have taken place between those interviews and now.

At a high level, it was expected that Phil would be leaving. The surprise came when Sarah wasn’t named as his successor, and Asha was chosen instead. Sarah had been Phil’s right-hand person, representing Xbox publicly and leading platform and hardware work. However, there had been a shift in Phil’s public presence since the Activision Blizzard acquisition, with Sarah taking on a more prominent role. Many believed she was being groomed to eventually take over from Phil, making Asha’s appointment unexpected.

Behind the scenes, there were rumors among Xbox fans that Sarah would be the next in line. However, there had been whispers about Sarah’s capabilities that differed from the public perception. So, while Sarah not being named was not surprising to some, Asha’s appointment was unexpected, especially considering her non-gamer background.

In terms of Microsoft’s gaming strategy, the acquisition of Activision Blizzard King and other studios aimed to make Microsoft Gaming a significant player in the industry. However, with pressure from corporate Microsoft to show returns on investment, there have been adjustments made within the division. This has led to studio closures, cost-cutting measures, and attempts to expand gaming services to new platforms. The push for profitability has sometimes resulted in rushed decisions, such as the “This is an Xbox” campaign, which aimed to increase revenue and growth but was met with confusion.

Ultimately, the pressure for profitability and growth in the gaming division comes from the top, with Satya Nadella and Amy Hood setting high expectations for margins. This pressure has influenced decisions made within the gaming division, leading to a focus on accelerating profitability at the expense of long-term strategy. Phil may have taken a step back in recent years, allowing Sarah to gain power over Xbox and lead marketing campaigns. However, the strategy has not been successful, even though Microsoft’s focus is on mobile and cloud services. The need for a new regime and execution strategy is evident, as the current approach has not been effective in reaching their goals.

The goal for Xbox has been to transition to a Game Pass subscription model, allowing players to access games from anywhere through cloud streaming. However, this strategy has faced challenges in execution and scaling, especially with the need to acquire and maintain content for Game Pass. Despite efforts to expand Xbox to all devices, including mobile, the path forward remains uncertain. They were unable to successfully implement this in a way that was effective. The desire was for cloud and mobile integration, but the growth in that area is not currently happening for Microsoft. The purchase of Activision was aimed at expanding into the mobile gaming market, with a focus on acquiring mobile IP like King and Candy Crush. However, it’s too early to determine if this strategy has been successful. Phil Spencer emphasized the importance of mobile gaming for the future of the industry, but it remains to be seen if this approach will pay off for Microsoft. Other companies like Nintendo and Sony have found success without a strong focus on mobile gaming, relying instead on their exclusive IPs and content. Microsoft’s challenge lies in attracting younger audiences who may not be interested in traditional consoles, which is why they are looking to mobile gaming to capture that demographic. I am not very knowledgeable about Nintendo because they have a unique approach, especially with the Switch. However, I believe Microsoft is concerned about this and it has influenced their focus on developing content. The key is to create content that can reach people on mobile devices and meet them where they are.

Playing games across different devices, such as on TV or through Xbox Cloud Gaming, is a major focus. However, the current situation with Xbox Cloud Gaming shows that mobile users make up a small percentage of players. Initially, the service was only available on mobile, but now most players use Xbox One or Xbox Series S or X. This has led to a loyal customer base, but Microsoft is looking for growth opportunities.

Microsoft has acquired several companies and is aiming to improve their presence in mobile and cloud gaming. However, restrictions from Apple and Google have hindered their progress in the mobile market. They are working towards having an app in the app store that allows users to easily purchase and stream games, similar to what is available on Android.

It’s important to note that a significant portion of Apple’s services revenue comes from in-app purchases in games. This revenue stream is crucial for Apple and they are unlikely to give it up easily. Microsoft has been trying to navigate this challenge, but regulatory pressure and other factors have made it difficult for them to expand in the mobile gaming market.

With Asha Sharma as the new head of Xbox and CEO of Microsoft Gaming, there are questions about the company’s strategy moving forward. Sharma’s lack of gaming background has raised concerns, but she is making efforts to engage with the gaming community. The focus now is on developing a strategy that can attract more players, especially on PC where there is a significant opportunity for growth. However, there is a risk that some people believe Microsoft may want to wash its hands of the gaming business and sell it off. This theory is rooted in the idea that Satya Nadella, Microsoft’s CEO, is focused on AI and may not see the value in the gaming division. There were even discussions in the past about spinning off the Xbox division, but Phil Spencer convinced Nadella to invest in acquisitions like Activision Blizzard instead. Shareholders may not be pleased if Microsoft were to write off such a significant acquisition like Activision Blizzard. Additionally, the Xbox division remains a successful consumer brand for Microsoft, so it is unlikely that they will run it into the ground. Ultimately, the future of Microsoft’s gaming strategy under Asha Sharma remains to be seen, but there are various possibilities and risks to consider. The current situation with Windows is peculiar. Surface is primarily focused on commercial use. If they fail in this area, it could impact their consumer market and AI capabilities. There seems to be a recognition of this within the company. It seems unlikely that they would completely abandon Xbox, especially under the leadership of Asha. Promoting Matt Booty to focus on game development and sales could be a strategic move if they decide to shift towards being a third-party publisher. This shift could involve collecting revenue from games like Candy Crush and Minecraft without drawing attention to it in earnings reports. This strategy could allow them to focus on other areas such as enhancing Copilot options for consumers. Asha’s recent memo hints at a potential return to focusing on Xbox, recognizing the importance of maintaining revenue from game pass subscriptions. The future moves Microsoft makes regarding Xbox will be worth watching closely.

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