The Future of Xbox is More Games, More People, and More Devices (Premium)

It’s fair to say that 2024 has not been the victory lap that fans expected after Microsoft’s successful acquisition of Activision Blizzard one year ago. The explosion of new titles on Game Pass never came, with Microsoft instead killing the most popular tier and raising the prices of the remaining tiers, giving us less for more. There were layoffs, and studio closures, and silence when it came to these important and troubling developments. But we’ve already focused on all the missteps this year–one might say we’ve obsessed over this–so I’d like to turn the page and look to the future. With a quick acknowledgement that this year’s problems aren’t isolated to Microsoft and Xbox. Perhaps this downturn caught them by surprise and was simply bad timing.

Perhaps. But where Microsoft has been clear about its plans for Xbox moving forward, it’s been less clear about how an integrated Activision Blizzard and all those successful game franchises fits within its broader strategies for the future. So it’s perhaps best to remind ourselves of why Microsoft acquired that firm in the first place. And then see what we can come up with.

Acquiring Activision Blizzard was an explicit declaration to the world that Microsoft is serious about games. If you think back to the Xbox One era, especially, when Sony PlayStation decisively out-performed Xbox on ever level, most will recall the silly “submarine” episode and Microsoft’s original plans for that console to be online-only. But that’s a red herring, a sad episode, yes, but one that obscures the real reason for Microsoft’s defeat. Where Sony was successful bringing exclusive games and game franchises to its platform, Microsoft was not. And it never recovered, despite a nice run of improving the original tank of a console with the Xbox One S–which I described as “the perfect thing” at the time–and then the Xbox One X.

The timing here is interesting and important. After seeing blockbuster success with the Xbox 360–a console that sold neck-and-neck with the PlayStation 3–Microsoft released the Xbox One in November 2013, and then its current CEO, Satya Nadella, took control of the company. Nadella is a lot of things, but I’ve confirmed with multiple sources over several years that his first course was to meet in turn with the company’s product group leadership with the specific aim of seeing which could meet his two objectives: They must be successful as a business now or have a plan to become successful in some number of years, and they must fit in with the new corporate strategy, which was entirely cloud-focused.

Those that didn’t meet these criteria were told to pack up their bags and seek employment elsewhere, inside the company or not, the most infamous example being the Windows Phone team. But it is still somewhat astonishing to me that Xbox survived this purge: Despite its unit sales success with the Xbox 360, Xbox had never been profitable, and it wasn’t clear that it could ever be profitable given the negative to very low margins of its hardware focus. If Xbox couldn’t make money with a product as successful as the 360, how would it ever be profitable?

Phil Spencer saved Xbox by promoting a vision of the future in which Xbox shifted from that hardware focus to becoming a subscription service. This would be possible thanks to the success and scale of Azure, the linchpin of Microsoft’s cloud strategy and the source of its stunning market growth under Nadella. And it aligned perfectly with how Microsoft monetized its commercial products, not with spread-out, milestone-based product releases, but with steady, monthly licensing fees. Xbox would move off the old retail sales model, with its big spikes after major product releases and big lulls otherwise, and it would slowly reverse its margins issues while doing so.

The result was Xbox Game Pass, of course, which quickly escalated into a version for PC, PC Game Pass, and a premium offering that spanned console, PC, and cloud streaming called Xbox Game Pass Ultimate. In more recent years, Xbox Live Gold, Microsoft’s original Xbox subscription, became Xbox Game Pass Core. And thanks to economics tied to the Activision Blizzard acquisition and a handful of its hit franchise titles, Xbox Game Pass (for console) was reimagined as Xbox Game Pass Standard.

It’s not necessary to step through the entire history of these offerings. But it is important to know that Game Pass was originally positioned to game publishers as a way for them to earn new revenues on library titles that had long since stopped selling. And that it was positioned to gamers as a low-cost way to enjoy a big and growing library of mostly high-quality games. Though the distribution was entirely different, this was similar to how Netflix positioned its online service back when it was still mailing DVDs around the country. That is, it was a complementary service for fans, one that would secretly become the entire business over time. And would then (hopefully) achieve stunning new levels of success in doing so.

As is the case with Netflix, however, Microsoft needs content for Game Pass to be successful, and its long-term plans were always for Game Pass to expand and go up-market with new, high-quality, AAA titles, to make it a no-brainer for gamers in the same way that Microsoft 365 is a no-brainer for those who would have historically purchased an Office suite every several years but see the value in the cloud storage and multi-user capabilities. And so Microsoft began acquiring studios so it could emulate the way Sony was successful, but do so in a way that leveraged its unique strengths in cloud distribution and, it hoped, game streaming. The biggest of those acquisitions, by far, was Activision Blizzard, an apex predator in a crowded and enormous market, and a company that had, to date, ignored the cloud streaming and subscription services that Microsoft was pushing.

During the regulatory battles leading up to the acquisition, Phil Spencer and others at Microsoft repeatedly emphasized that their goal for Xbox for the same as Microsoft’s goals with its other platforms, which was to meet their customers where they were. For Office, this meant bringing the apps to the iPad, one of Nadella’s first big public announcements, and a move his predecessor had refused to take. For Xbox, this means moving past the unprofitable console hardware and expanding the platform to “any screen.” This takes many forms, and the strategy has been knee-capped to date by Apple and Google’s respective strangleholds on mobile game distribution. But it’s a good idea. It’s always been a good idea.

The question, of course, was how Activision Blizzard would fit in within the other studios Microsoft owns and with its growing stable of subscription services. After all, among the many changes made to Game Pass since its inception was that subscribers across Xbox Game Pass (for console), PC Game Pass, and Xbox Game Ultimate would get any new Microsoft studio titles on day one. And that would seem to undercut the cash bonanza that Call of Duty, in particular, delivered in the month or two following each annual release.

Well, not seem. Clearly, the accountants at Microsoft had to explain to their higher-ups that this system was untenable, especially for its most popular console subscription. And so Microsoft killed off Xbox Game Pass (for console), replacing it with Xbox Game Pass Standard, which does not get new Microsoft studio games on day one. And then it raised the monthly cost of PC Game Pass and Xbox Game Pass Ultimate. Problem solved, perhaps. Or maybe it just reduced the hemorrhaging. The business isn’t transparent enough to know for sure.

In any event, it’s been a year. Microsoft acquired Activision Blizzard for an obscene sum one year ago, pushed only a tiny handful of its titles into Game Pass. And last week, it delivered the newest Call of Duty title, which seems to be off to a good start and using a mostly a traditional retail-style sell-through model. We’ve navel-gazed about the future of Xbox many times. So what does the future look like?

Satya Nadella won’t say. In his annual letter to shareholders, Nadella mentions Xbox and gaming only briefly, and it’s all about “momentum,” as I call this, though Xbox is nothing but lack of momentum at this point.

“We are bringing great games to more people on more devices,” he writes. “With our acquisition of Activision Blizzard King, which closed October 2023, we’ve added hundreds of millions of players to our ecosystem. We now have 20 franchises that have generated over $1 billion in lifetime revenue—from Candy Crush, Diablo, and Halo, to Warcraft, Elder Scrolls, and Gears of War. And with Xbox cloud gaming, we continue to innovate to offer players more ways to experience the games they love—where, when, and how they want. Finally, we brought four of our fan-favorite titles to Nintendo Switch and Sony PlayStation for the first time, as we continue to extend our content to new platforms.”

OK, there is one hint in there, right at the end. When Microsoft revealed that it would bring four games–four mostly non-AAA in-house games–to rival consoles earlier this year, the Xbox fan base went ballistic. But as I’ve argued all along, this was entirely in keeping with the broader strategy for Xbox, as deftly described in the first line of Nadella’s gaming recap: “Great games to more people on more devices.” And so he vaguely confirms that a key of part of the strategy will continue: We will see more Xbox games–more Microsoft studio games–appear on rival platforms. Not to prop up those platforms, neither of which needs the help. But to make real the strategy Microsoft has been voicing for years. This is about Xbox transitioning from a money-losing console to become a bigger, software and services-based platform that’s platform–or screen–agnostic. Microsoft will meet gamers where they are, not where it once wished they were.

Left unsaid there is the mobile angle. Microsoft has voiced its desire to bring a mobile apps/games store to Apple’s and Google’s mobile platforms, and it even explicitly revealed that a recent Google antitrust loss–now held up in the appeals process, as it should be–would lead to that happening on Android. It also said that a similar regulatory issue for both Apple and Google in the EU would likewise lead to mobile stores in that region.

Microsoft’s mobile strategy has two major components. There are mobile-native games, of which the firm had only a few before the acquisition, though that’s improved nicely since. And there is the Xbox Cloud Gaming component–curiously written without the capitalized branding in that shareholder letter–that will bring console-quality titles to incompatible devices, not just mobile but also set-top boxes like Amazon Fire TV, via the Internet.

That capability has failed to date, in part because it requires serious bandwidth and, more crucially, low latency. In my experiments with cloud streaming over the past few years, I’ve only once gotten a AAA first-person shooter to work well (more on that in a moment). And never via Xbox Cloud Gaming, which is limited for now to the most expensive Game Pass tier. So how will that work?

Laurent tested the new Call of Duty on Xbox Cloud Gaming over the weekend, and I was surprised when he reported that it worked quite well from a performance perspective, though he was disappointed by the blurry image quality. But the caveat there is that he has a very high speed and nearly symmetrical (1 Gbps down/700 Mbps up) Internet connection. On my more pedestrian connections in Pennsylvania and Mexico City, both of which throttle upload speeds to a fraction of the download speeds, this type of game is basically unplayable.

Microsoft can push more resources at Xbox Cloud Gaming, among other things by opening up the floodgates from a connection speed perspective. But that’s expensive, and this is a bad time for it to be optimizing for non-AI Azure workloads. What Xbox Cloud Gaming needs, as I wrote two years ago, is the same technology that Google used in its sadly discontinued Stadia service.

“The Stadia Controller has its own direct connection to the game you’re playing in the cloud,” I wrote at the time. “That is, it doesn’t create a separate connection to the device that has the screen on which you see the game. This further simplifies the notion of using virtually any device with Stadia, but it has that other, equally important benefit of improving performance. It makes game streaming viable.”

Amazon uses a similar system with its Luna service, assuming you use a Luna controller. This system helps eliminate lag and latency, and it delivers an even better experience than wiring a controller using USB. So why hasn’t Microsoft created a new version of its Xbox Controller with this capability?

I believe it will do so. Indeed, according to the massive Xbox leak from a year ago, Microsoft planned to ship a Wi-Fi-enabled Xbox Controller with the Xbox Series X|S console refreshes it has still not delivered. So it’s possible that this controller is still inbound, though it may not arrive until a new console generation, or a more impressive refresh, arrives.

That is, I think, a mistake.

This is the piece that needs to be in place before Xbox Cloud Gaming and, thus, Xbox Game Pass in general, can be successful. This is what puts cloud streaming over the top, and makes it viable for Microsoft’s most important games and franchises. It’s what will realize that dream of “bringing great games to more people on more devices.” It’s what expands Xbox’s reach on mobile in this weird interim time in which regulatory and antitrust forces will shatter the Apple/Google distribution duopoly on mobile. It’s what gives Microsoft the time it needs to develop more mobile-native games, too, games that will one day soon be able to interoperate with their console and PC siblings, just as console and PC can today. (Think Call of Duty gamers on PC, Xbox, and PS all playing together in online multiplayer matches.)

Put more simply, Xbox is transitioning. And while 2024 has absolutely been that Annus horribilis that fans in no way saw coming, it was also a weird holding pattern of sorts in which Microsoft had to sort through unexpected issues with the Activision Blizzard acquisition related to it making sense in this subscription-based platform. And there will be new hardware, too, of course: Microsoft knows that it has pushed the fan base to its limits, and it will deliver at least one future console generation, hopefully based on a powerful and efficient Arm platform that will ease those mobile ports (and vice versa), and push Xbox into a more diverse and yet cohesive future.

That hints at other angles worth exploring with hardware, too. For example, Microsoft could license its Xbox OS to hardware makers, as it does with Windows. But the challenges there are many. PC-based mobile gaming devices have seen only limited success to date. PC laptops are getting powerful enough to play AAA games well. Mobile platforms are already powerful enough to perhaps take over in this space. But maybe mobile is the smarter bet overall, as evidenced by the Nintendo Switch. Could Microsoft finally offer a mobile Xbox gaming device, or let one or more third parties do so? It’s unclear. But moving to Arm certainly makes all that more of a possibility.

This is a lot of talk, I know, and I’m veering off into speculation. And maybe some misplaced optimism, though I feel like 2024 beat most of that out of me. Instead, I prefer to think of this as an attempt to explain rather than rationalize. Phil Spencer and Satya Nadella are no dummies, and I think this past year’s headwinds, as Microsoft would call them, were as unexpected and unwelcome to them as they were to the fans. The future of Xbox, broadly, is unchanged. It’s just that events need to line up for a new push to be meaningful. The PC industry correction, which one might tie to a future of AI-generated game environments. The regulatory issues on mobile. The latency issues on cloud streaming. And the platform innovations that will make an Arm-powered Xbox console real.

So we’ll see. But I think that’s the plan for Xbox. And that given how terrible this past year was, things can only get better. The sooner, the better.