The State of Xbox (Premium)

In the wake of yesterday’s Xbox Games Showcase and Starfield Direct events, Microsoft separately discussed the future of Xbox. The timing is, of course, critical: Microsoft’s $69 billion Activision Blizzard acquisition hangs in the balance with Microsoft needing back-to-back appeals court victories to consummate a victory that can only be described now as a remote possibility at best. So what we’re really discussing here are two futures. One in which Microsoft owns Activision Blizzard and one in which it does not.

That the first of those two outcomes is the more desirable is an understatement. As part of a worldwide marketing campaign over the past year and a half, Microsoft has publicly humiliated itself by belittling the Xbox platform in a bid to make it seem weak and uncompetitive compared to Sony, the market leader in consoles. The result is a more concrete understanding of how far ahead the PlayStation really is, and an explicit admission that Xbox can never, and will never, catch up.

Despite the downsides, this was the right tactic, and most of the regulatory bodies that opined on the merger gave Microsoft the thumbs-up, including rather audaciously, those in Japan, Sony’s home country. But there are two malcontents out there that have chosen the wrong target to show they’re serious about reining in Big Tech. And those two regulatory bodies, the U.S. Federal Trade Commission (FTC) and the UK Competition and Markets Authority (CMA), have shown the world the danger of Microsoft’s strategy. If Microsoft doesn’t acquire Activision Blizzard, it must now overcome all of the data it provided that proves that Xbox isn’t even competitive.

In a world in which Microsoft goes it alone, nothing changes. Xbox is still the number two console, but now we know that Sony outsells it by 3-to-1 or even 4-to-1, depending on the locale, and that Sony’s lead is growing over time, not shrinking. We know that Microsoft still has a huge disadvantage when it comes to exclusive titles and that it has been slow to release major blockbusters while Sony surges ahead, and the few big titles that Microsoft has released recently have been duds or non-events. And we know that Microsoft “leads” in cloud gaming, while understanding that this part of the market is tiny and likely will always be so. Microsoft is a small fish in the big pond that matters to it today (consoles), a big fish in the small pond that will never matter (cloud), and a non-event in mobile. The only good news there is that Sony is too.

Activision Blizzard is about a few different things, including the strength of its big franchises, like Call of Duty, and bolstering its Xbox library Game Pass subscription services with more and better titles. But it’s also about mobile and is arguably mostly about mobile. Certainly, Microsoft has made that case as needed, and probably partially to offset concerns about Call of Duty. Here, we see the major hole in Microsoft’s Xbox strategy, its Achilles Heel: regardless of Activision Blizzard, Microsoft should have—and could have—pushed hard in mobile, but hasn’t. One wonders what it could do in this space with just a small percentage of the $69 billion in intends to spend on Activision Blizzard.

Anyway, Microsoft’s wrap-up post about the future of Xbox, a discussion that included Head of Xbox Phil Spencer, Head of Xbox Creator Experience Sarah Bond, Head of Xbox Game Studios Matt Booty, and Bethesda Game Director Todd Howard is worth reading. And it provides a few hard(ish) numbers to what is usually a conversation devoid of such details. Separately, Microsoft provided me with a data point that I think is the most relevant of the bunch, that over half of those who purchased an Xbox Series S last year were new to Xbox. This is the type of data point that Apple would incessantly promote. (And it’s the type of double-digit growth that, frankly, seems a bit suspicious.)

Anyway, here’s the list of data points Microsoft publicly shared:

• Xbox has “reached new records for monthly active users and monthly active devices.”
• Xbox Game Pass usage surged 46 percent in the most recent quarter.
• Xbox subscription revenues overall reached nearly $1 billion last quarter.
• Xbox Game Studios and Bethesda have shipped 10 games with over 10 million players each.
• Microsoft’s first-party games now have over 150 million monthly active users.
• The ID@Xbox indie game program has now paid out over $4 billion to over 5,000 creators in over 100 countries.
• PC Game Pass has expanded to 46 more markets, for a total of 86.
• There are currently over 5,000 games in development for Xbox from developers across 100 countries. “That’s more games in development from third parties than at any time in Xbox history,” Microsoft adds.
• The supply chain problems that dogged Xbox from 2020 until recently are over: “We’ve been able to increase our supply globally making Xbox Series X easier to find than ever before,” Microsoft claims.

But more interesting, perhaps, are the promises. Despite the very real possibility that Microsoft will not be allowed to acquire Activision Blizzard, the software giant is still planning a future that can make sense for Xbox fans. It will try to “release at least four first-party games a year,” addressing the two-year drought of major new titles we’ve just experienced. And Microsoft promises that it is “committed to investing in new franchises, taking risks, and creating the most diverse line-up of games from any company in the industry.”

That’s all well and good. But I see problems everywhere.

Microsoft has a lot riding on Starfield, which it will release simultaneously on Xbox Series X|S, PC, Steam, Game Pass, and Xbox Cloud Gaming. (But not, notably on Sony PlayStation as this is the one key example of Microsoft pulling a cross-platform port after an acquisition.) “It’s our belief that Starfield will become the most-played Bethesda Game Studios title, ever,” Microsoft claims. But this title will launch with just 30 fps gameplay on Xbox, another kick in the shin to the notion that Xbox Series X is somehow the world’s most powerful console.

And consider this claim: “every one of the Game Pass titles featured this year comes from a creator that has previously released a game with Game Pass.” That sounds great, and it implies that this subscription is so successful that developers are coming back for more. But it has likewise not attracted any new developers? Hm.

Microsoft is touting a “new” Xbox console, too, the Xbox Series S Carbon Black edition. This console comes in black, not white, and has a much more agreeable 1 TB of storage (vs. 500 GB), which is crucial given the exploding install size of modern game titles, and the $349 pricing is right. But this console is otherwise identical to the Series S at a time when perhaps Microsoft should be moving the Series X into the entry-level (or mid-level) position in the product lineup and pushing a higher-end console that can actually achieve 60 fps in all games. Maybe next year.

Microsoft’s attempt to acquire Activision Blizzard was a high-profile statement that it intended to turn Xbox, ever the also-ran, into a major player in a gaming market that is getting bigger and becoming more diverse. But should this acquisition fail, nothing Microsoft said or promised changes its status. Instead, Xbox today is diminished and will remain so. Sony will continue to dominate the market for consoles. Nintendo will continue to be Nintendo, with its unique take on gaming. Apple and Google will continue to dominate mobile. And Steam, Epic, and various standalone studios will continue to control PC gaming.

Put more succinctly, Microsoft will be a distant number two in console gaming, will remain a relatively minor player in PC gaming, will compete well in cloud gaming, a market that doesn’t matter in the slightest, and will have no position whatsoever in mobile, the biggest gaming market of all.

But simply, Microsoft needs Activision Blizzard, not so much because of consoles, which are the past, but because of the subscription and mobile gaming that are the future. And if that acquisition doesn’t happen, the future for Xbox looks bleak. I hope I’m wrong.