Redacted: Achieve Industry Leadership by 2030 (Premium)

Among the many leaked Xbox documents is a fascinating peek at Microsoft’s strategy for Xbox over the next ten years. Here are a few thoughts about this vision for the future.

But first, be sure to read Laurent’s news coverage of this unprecedented event, which includes details about the 2024 Xbox Series X and Series S refreshes, Xbox Wireless Controller with modular thumbsticks, accelerometer, and haptics, and Microsoft’s roadmaps for a truly next-generation console and first-party games.

All of this news came out of a “Highly Confidential” legal filing that includes Phil Spencer’s October 11, 2022 testimony transcript from a remote investigative hearing with the U.S. Federal Trade Commission (FTC) tied to the Activision Blizzard acquisition. In the wake of this event, there were various theories about who might have made the leak and why, but Microsoft has admitted internally that it, not the FTC or some third party, was “unintentionally” responsible for the leak.

“This is disappointing, even if many of the documents are well over a year old and our plans have evolved,” Mr. Spencer wrote to employees in a memo today. A carefully worded memo: My first thoughts upon seeing the material was that this could be devastating to the Xbox business, which is already struggling, given how far we are from these product releases, and that some details have surely changed since last October. By stating this explicitly—Spencer knew the memo would immediately leak to the press—he is wisely creating some doubt that the next 15 months are already spoken for. (He used similar damage control language publicly on Twitter, too.)

“I also know we all take the confidentiality of our plans and our partners’ information very seriously,” the memo continues. “This leak obviously is not us living up to that expectation. We will learn from what happened and be better going forward. We all put incredible amounts of passion and energy into our work, and this is never how we want that hard work to be shared with the community. That said, there’s so much more to be excited about, and when we’re ready, we’ll share the real plans with our players.”

The leak consists of a single legal filing plus dozens of supporting documents, or attachments, which are each given exhibit numbers. According to the transcript, FTC attorney James Weingarten asked Spencer mundane questions about market definitions and so on, and there is literally nothing interesting in this discussion.

But the supporting documents are quite a bit more interesting, and here I will provide an overview of just one of set of them, related to the Xbox strategy going forward. Some key highlights and observations follow.

In an email exchange with Spencer and several others on May 5, 2020, Microsoft CEO Satya Nadella says that “If I look at Apple, Google, and Valve, I see a $30-$40 billion store opportunity. So our opportunity is to address that TAM [total addressable market]?” To this, Spencer replies, “Yes.”

But then Nadella responds with an insightful question: “What is our unifying/big bet? Is that everything that starts with the cloud? … Is our future really just xCloud?”

This is fascinating. We outside of Microsoft have been debating this for years as well, and I have long made the case that the future of Xbox is tied to Microsoft’s broader strategy of meeting customers where they are. That is, moving away from the money-losing console business and putting Xbox games everywhere possible, more and more via subscriptions.

“We need to win on both depth (core gamers) and breadth (xCloud),” Xbox corporate vice president Karem Choudhry responds.

“Today, we have 3 workloads, xCloud, Windows 365, and Mesh … my dream is to have standard Azure parts to power all 3 workloads, with fungibility across,” Nadella replies after a bit of back and forth about the state of Microsoft Silicon at the time. “Then at the edge, it needs to be hybrid that is common across next gen HoloLens, Xbox, and Win365. We can do this.”

(Anyone else surprised that the CEO of Microsoft mentioned “next gen HoloLens” there?)

There is some interesting talk here that involves Panos Panay, who mentions “synergies” between the silicon needs of Xbox and Windows, and that he can walk the Xbox guys through “Win3,” which he says they can leverage. Arm also comes up, and the belief among these executives is that x64 will continue to beat Arm because of inertia and familiarity. But Xbox should “do due diligence” on Arm regardless, because of the improving performance gains, sustainability, and costs of that platform.

“As I look at this, we have 4 systems that need to compose: (1) hybrid Al, (2) Al-assisted graphics subsystem, (3) input stack, and (4) hybrid video,” Nadella concludes. “We are building 4 types of computers: (1) cloud everything, (2) a hybrid Xbox, (3) hybrid Windows, and (4) hybrid HoloLens. We need to bring the company’s systems talent together to align on a unified vision. We can’t go from big idea to big idea. We need a single big idea to rally the company around.”

That’s the end of the exchange. But tied to this is the reason for this exchange: Microsoft’s gaming leadership had gathered earlier for a gaming strategy review. And its overreaching goal as expressed in the attached slide deck is both succinct and hard to believe:

“Achieve industry leadership by 2030.”

At that time, Microsoft’s own numbers put it in fourth place in the gaming industry with $16 billion in 2021 revenues, behind Tencent ($33 billion), Sony ($25 billion), and Google ($18 billion). Apple and Nintendo are tied in 5th place with $15 billion in gaming revenues. Interestingly, Activision, with its $8 billion in revenues would have catapulted Microsoft into a near-tie with Sony for second place.

There is so much confidential data in this presentation. And as I have long suggested, console sales have little to do with it: Xbox console sales actually contributed less in 2022 ($3.88 billion) than they did in 2014 ($4.3 billion), one slide reveals, and while console revenues are projected to hit $7 billion, its percentage of total Xbox gaming revenues will go down over that time to just 19.44 percent (vs 21 percent in 2022). In this imagined future, transactions across cloud, PC, and console ($16 billion) will be Xbox’s biggest money maker, followed by subscriptions ($7.8 billion), console sales, mobile transactions ($2.6 billion), and advertising ($1.4 billion). Those latter two businesses contribute no or negligible revenues today.

Microsoft’s expectations for gaming in 2030 include seamless, hybrid compute spanning cloud to edge (the device you’re gaming on) and rich, immersive experiences across all device types. And meeting this challenge will require a “next generation technology platform.”

And to get here, Microsoft will essentially do what I’ve been predicting by moving from the independent (within Xbox) “console first and primary” strategy of this platform to date to the full convergence (within Microsoft) of 2030. Known milestones along the way include the OS convergence (Xbox OS/Hyper-V/Windows 8) of 2013 (Xbox One) and the cloud-optimized hardware and unified GDK (Game Development Kit) of the current generation.

Obviously, it gets vague at times. Where the Xbox One brought the Xbox Security Processor, Game Pass, and “DirectX innovation” (whatever that means), and Xbox Series X|S arrived with Project xCloud, Direct Storage, and DFA (design for assembly) manufacturing, the next-gen Xbox platform will deliver cloud hybrid games and an immersive game and app platform. This will not be a console generation, the presentation explains, but an ecosystem generation that spans browser, mobile, smart TVs, low-end/mid-range PCs, streaming sticks and set-top boxes, handheld gaming devices, cloud console (codenamed Keystone), consoles, and high-end PCs, all running on Azure.

Where we tend to think about frame rates, resolutions, and other graphics technologies today, this future platform will be enabled by cohesive hybrid compute, AI and ML (machine learning) enablement (optimizing and accelerating game performance, operations, and development), and an open and extensible creator platform and app development platform.

And sure enough, they were looking to Arm for the hardware, perhaps co-designed with AMD or licensed from AMD, with an NPU (of course), and forward compatibility (?). Still up in the air was whether Microsoft would make an investment in a thin OS that could run on devices that cost less than $100. If this strategy persisted, Microsoft will have just finalized its plans for all of that hardware. I would love to know if it made that bet on Arm or simply punted to x64 yet again.

An overview of the gaming market and Xbox specifically is also included in this supporting document, and while much of it is obvious and/or uninteresting to this audience, there are still a few tidbits worth mentioning.

Microsoft’s growth strategy for fiscal year 2023—which ended this past June 30—included (at the time) accelerating Xbox console growth (which we know failed), accelerating Game Pass growth on PC (unknown, but likely a small business), and accelerating growth for game creators. And at the time of this document’s creation (May 2022, just two months before the end of that fiscal year), Microsoft reported internally that it would meet these goals.

Here are some hard numbers. At the end of fiscal year 2022 (which ended June 30, 2021), Xbox had total revenues of $17.7 billion, content and services revenues of $14.4 billion, 35 million Xbox Game Pass subscribers, 3.9 million Game Pass PC subscribers, 117 million monthly active users across the platform, and 41.6 million Xbox console monthly users (all consoles).

Microsoft also described its competition.

Amazon, it said, had diverse gaming-relevant assets, including Twitch, Luna, Kindle Fire devices, Amazon Games, the Open 3D Engine, and its Amazon Prime lock-in. More problematic, Luna’s use of AWS competed with xCloud’s use of Azure.

Apple was (and is) a more formidable opponent, with its successful devices and services. “While Apple currently enjoys a considerable share of the mobile gaming transactions market, its control may be diluted depending on the ultimate result of the Epic v. Apple litigation, which could allow developers to use alternative payment methods outside of the App Store,” the document explains. “For Microsoft, our ability to stream games to iOS endpoints is an important part of our cloud-native strategy. Apple’s App Store policies are prohibitive, preventing us from running a gaming subscription service in the App Store. Because we are prohibited from offering a native iOS Game Pass application, we are pursuing a browser-based strategy for our streaming platform, which faces discoverability and other challenges, but provides a consistent experience for players and developers across all connected endpoints and will make iOS devices addressable.”

Google has “impressive but loosely affiliated” gaming assets, Microsoft said at the time, and its Stadia service, an xCloud competitor, failed. But Android had over 3 billion users and Google Play Store and YouTube were important assets.

Tencent was/is the largest firm in gaming as measured by both revenue and profit. It had social networks, an app store, a PC gaming platform, a broad portfolio of content, and minority stakes in key gaming firms like Epic Games, Riot Games, Sea Limited, and many others. “Tencent is a behemoth in gaming,” Microsoft noted.

Epic was an “industry pureplay” with one of the most popular games in the world in Fornite, but it faced legal challenges, a money-losing app store, and could perhaps turn to Microsoft for future distribution needs.

Nintendo, the “long-time leader in console gaming,” used “novel hardware innovations” to win this console generation. But because its strategy is so different, the opportunities are different too. I suppose the businesses are somewhat complementary (my words, not Microsoft’s).

And then there’s Sony. The PlayStation 5 is and was handily beating Xbox in both the current and previous console generations. But its cloud- and subscription services were lagging, and “Sony has limited growth vectors beyond the [console] segment,” Microsoft concluded. This mirrors my own thoughts on this battle, that for Xbox to win, it needs to leave the console world behind.

So there you go. That’s just one of the supporting documents. I will be looking at some of the other revelations from this leak soon.