What Exactly is Xbox Now? (Premium)

I’ve often found myself in meetings with Microsoft or other companies when a PR representative will try to save everyone a bit of time and dispense with the basics because they understand I know the underlying topic well. I appreciate that, of course, but I always ask whether it’s OK for the person I’m meeting with to start at the beginning regardless. I want to test my understanding of the topic, to some degree, but mostly this is to see whether anything subtle has changed in the messaging. Regardless of the product or service we’re discussing, I find the ways in which companies promote them to be interesting and sometimes revealing.

With that in mind, I’ve been thinking about Xbox a lot in recent weeks, for obvious reasons. Microsoft isn’t talking right now, also for obvious reasons. And so I was clicking around the Xbox website, wondering about the point of it all. And it occurred that even that presentation can be useful. The first three top-level menu items there–Game Pass, Games, and Devices–serve as a simple and obvious reminder about the fact that this organization shows to the world.

So let’s discuss that. In reverse order. For reasons.

? Hardware

Microsoft launched the Xbox Series X and S in late 2020 at the height of the COVID-19 pandemic and the resulting component shortages. This was a not-so-subtle shift from previous Xbox generations. With the Xbox 360 and Xbox One, Microsoft had followed up the initial console release with multiple revisions that combined the usual cost reductions with new capabilities. By the end of the Xbox One run, we had Xbox One S and Xbox One X models selling side-by-side, and so Xbox shipped two consoles side-by-side for the current generation. Sony did the same thing with the PlayStation 5. But Sony now has three PS5 models thanks to the PS5 Pro.

I point this out only because things change. Despite this, many diehard Xbox fans quibble with any deviation from what they feel is the “correct” way of doing things. But what some might call I correct I would describe as old-fashioned. Consoles carve a unique niche between smartphones/tablets and gaming PCs, and all these platforms are evolving. Nintendo has seen great success with its mobile-first Switch console, a market most experts didn’t feel existed.

Thanks to that success, Xbox and PlayStation are now plotting their own mobile console strategies But these two hardware makers have also pushed for years to make ever-more-powerful versions of their consoles that can compete with gaming PCs on the other end of their niche. As currently architected, consoles will never beat the graphical fidelity or raw performance of high-end gaming PCs, but they offer good-enough visuals and performance along with a simpler, hassle-fee experience.

There’s just one problem. Suddenly, even pedestrian laptops built with the latest AMD and Intel silicon–Radeon Zen 5 and Core Ultra Series 2, respectively–deliver excellent Full HD gaming experiences that intrude into the console space. OLED displays with HDR and dynamic/high refresh rates are common. And thanks to ongoing work by Microsoft, Windows 11 is now a more hospitable environment for gamers, with built-in capabilities like Game Mode, Game Bar, AutoSR, and more.

PCs will never be as simple as consoles. But they can get close. Arm hardware platforms like Qualcomm’s Snapdragon X deliver impressive performance plus dramatically improved reliability and efficiency. Microsoft has worked to make Game Bar and the Xbox app work well on the small screens used by gaming handheld PCs. And now we know that Microsoft has also adapted Windows for use on what can only be called an Xbox console, the Xbox Ally gaming handhelds that arrive in late 2025.

This sets the stage, I think, for the future of Xbox hardware broadly. Based on everything Microsoft has said and implied, it’s clear that future consoles will run a modified Windows similar to that on Xbox Ally. And it’s reasonable to believe that that Microsoft will allow third party hardware makers to make standalone Xbox consoles, which are really just PCs with a simplified software platform, just as they are now doing with Xbox Ally gaming handhelds. Factor in Microsoft’s historic inability to make its Xbox hardware profitable, it’s thus reasonable to assume that the long-term plan is to cede hardware to its partners completely.

So. Xbox used to be a single console. Then it was a family of consoles that evolved over a generation. And then it was a set of console models delivered concurrently. That latest generation of consoles was supposed to receive a fairly impressive set of upgrades midstream based on the leaks we’ve seen, but all we’ve gotten so far are modest refreshes with small storage upgrades. With the coming Xbox Ally gaming handhelds, Microsoft will finally push Xbox into mobile hardware. Will it also push non-mobile Xbox hardware beyond two functional tiers and allow for component upgrades as we see on real PCs?

This makes sense to me, but it’s just speculation. And even if that doesn’t happen explicitly, what it means to be Xbox hardware is changing. As it will. And as it should. Some fans will push back against these changes, ignoring the fact that change has been the one constant in this market since its inception in the 1970s. And ignoring that this thing they love has failed and would disappear if nothing changed.

And let’s at least embrace the beautiful symmetry of Xbox returning to its PC roots. The name Xbox is a shortened form of “DirectX box,” as the original push to make this console was about bringing Microsoft’s Windows-based DirectX gaming libraries to a console. To make this as seamless as possible, the first Xbox was basically a Windows PC running on an x86 hardware platform. As were every single Xbox since then, except for the Xbox 360, an outlier built on Power PC. The current strategy, as I understand it, basically brings Xbox hardware full-circle. And allowing third-party hardware companies to build future consoles will erase the financial losses Microsoft would have otherwise endured.

?️ Software

Xbox has obviously always been about games, with Microsoft quickly establishing its console lineup as a viable alternative to market leaders like Sony and Nintendo. That it basically replaced Sega in this market is perhaps interesting, perhaps not. But in addition to attracting support from third-party game publishers, Microsoft has pushed various AAA first-party game franchises of its own since the dawn of Xbox, which launched alongside Halo: Combat Evolved.

Microsoft has published videogames since the late 1970s, but except for DONKEY.BAS in PC-DOS 1.0 (which was cowritten by none other than Bill Gates), most of its earliest titles–Adventure, Flight Simulator, and so on–were licensed from others or ported to MS-DOS or Windows by Microsoft employees (Minesweeper, Solitaire, etc.). In the Xbox era, Microsoft’s gaming efforts have been dominated by acquisitions. Halo was made by Bungie, for example, which Microsoft acquired in 2000. But Microsoft also acquired FASA Studio (1999, Mech Warrrior series, Shadowrun), Access (1999, Amped, Top Spin), Digital Anvil (2000, Starlancer, Freelancer), Ensemble (2001, Age of Empires series, Halo Wars), and Rare (2002, Perfect Dark series, Viva Pinata, Sea of Thieves) in the early years alone.

During the Xbox 360 era, Microsoft made only a single notable videogame acquisition, of Lionhead Studios in 2016, which resulted in Fable. Oddly, the two other acquisitions in that era, of Twisted Pixel Games in 2011 and Press Play in 2012, both amounted to nothing, with both closed down four years after the respective acquisition.

Microsoft then purchased Minecraft maker Mojang in 2014, an enormous acquisition that many found confusing at the time. But this was the first major move by Phil Spencer, who had become Xbox division head just months earlier. Microsoft CEO Nadella asked why Microsoft should spend $2.5 billion to buy a videogame company when Xbox had been consistently outsold by its competitors, but Spencer offered a “pretty bold vision” of a future in which–wait for it–Microsoft’s gaming ambitions would expand beyond the console to a broad audience.

Thanks to Phil Spencer’s leadership, Microsoft was a terrific steward of Minecraft, the right steward, if that makes sense. And it would use that success to guide future non-gaming acquisitions, like GitHub, which landed in 2018 for a cool $7.5 billion. But Spencer wasn’t done transforming Xbox. After being elevated to Nadella’s Senior Leadership Team (SLT), Spencer orchestrated a string of high profile acquisitions. In 2018 alone, Microsoft acquired Ninja Theory (Hellblade series), Undead Labs (State of Decay series), Compulsion Games (We Happy Few), Playground Games (Forza Horizon series), inXile Entertainment (Wasteland series), and then Obsidian, which went on to make The Outer Worlds and Grounded series, Pentiment, and Avowed.

Microsoft acquired Double Fine of Psychonauts series fame in 2019, setting the stage for the mammoth acquisitions that would make the software giant the world’s biggest videogame publisher. The first was ZeniMax Media in 2020 for $7.5 billion. This brought Arkane Studios, Bethesda, id Software, MachineGames and ZeniMax Online Studios in-house along with an incredible stable of games that include DOOM series, Dishonored series, Deathloop, Elder Scroll Online, Wolfenstein series, Indiana Jones, Quake series, and many others.

The second, of course, was Activision Blizzard.

Where to start? The price, $68 billion, is extravagant. The list of game studios and publishers it owns–Activision, Beenox, Demoware, Infinity Ward, Raven, Sledgehammer, Treyarch, Blizzard, King, and many others along with various subsidiaries–is enormous. And the list of blockbuster games? It’s almost not even worth stepping through, but the biggest include the Call of Duty series, Fallout series, Skyrim, Tony Hawk series, Crash Bandicoot series, Marvel Ultimate Alliance series, Candy Crush series, Diablo series, Overwatch series, Warcraft series, and a lot more.

Tied to Spencer’s transformation of Xbox, most if not all the studios that Microsoft has acquired create games across multiple platforms and not just Xbox/Windows. This was initial controversial because Microsoft’s console competitors both created games exclusively for their devices. But Sony has expanded its ports of first-party titles to the PC, and even Nintendo has dabbled in smartphone games. As the perennial last place finisher in consoles, Microsoft could have limited more of the games it published to Xbox/Windows, but that would have been economic suicide. Instead, Spencer sent Xbox and Microsoft Gaming down a path that echoed Nadella’s positioning for the rest of the company: They would meet customers where they were. And if that means using rival hardware platforms, so be it.

This strategy is good for Microsoft, and it’s notable that several Xbox/Microsoft titles are among the best-selling games on PlayStation 5 this year. It’s also good for gamers in a “more the merrier” sense. When I played Call of Duty 2 on my Xbox 360 in 2005, I could only compete against other gamers using that console. Today, when I play Call of Duty: Black Ops 6, I can compete against gamers on Xbox consoles, PlayStation consoles, and Windows PCs, a much, much wider audience. And should Microsoft ever halt first-party Xbox hardware sales, the success experienced by Microsoft’s vast game publishing empire would put that business in the black for the first time.

I know what you’re thinking: “But, but, … layoffs.”

Yes. Let’s discuss that.

While it’s painful to see one of the world’s most powerful companies layoff so many, especially so many in gaming roles, at the height of its greatest success, it’s important to have all the facts. And we don’t, not yet. But as more stories emerge describing the game studio and game closures that Microsoft enacted this past month, one key theme keeps emerging: They were given millions of dollars and all the time they needed to make their visions real, and all of them failed. I’m sure some exception will emerge, but this wasn’t Microsoft swinging a big axe blindly. It’s also worth pointing out that Amy Hood and the other bean counters in Microsoft’s C-suite have identified structural complexity and over-hiring everywhere in the company. And that this may be particularly problematic in gaming, which surged artificially during the pandemic but has more recently receded to normal levels.

Put another way, Microsoft’s acquisition spree under Phil Spencer achieved its aims, and it plays a major role in the transformation of Xbox. But this “pretty bold vision” also led to some complications and complexities. Where Xbox and Microsoft Gaming were arguably too small in the pre-Spencer days, one might argue that it’s too large today, too deep, too broad, with too much infrastructure., levels of management, and studios all over the world working on but not finishing too many games. Don’t misunderstand me on this point, I’m not happy with the layoffs. But it’s possible this was a long-overdue course correction and that the net impact will be to right-size the business for the market as it stands today.

And let’s be serious. The issue here isn’t the games. And it’s not that many of them are cross-platform. It’s that Phil Spencer’s and Satya Nadella’s biggest collective bet on gaming may have been a mistake.

Yes, it’s time to discuss Game Pass.

☁️ Subscriptions

When Nadella made his big bet on Mojang in 2014, he had just become Microsoft’s third CEO. He immediately put his stamp on the company by requiring each business within the company to justify its existence while embracing cloud computing. The Xbox One had landed with a thud, and it was clear that competing with Sony and Nintendo head-to-head in consoles alone was never going to work.

Spencer’s game studio buying spree was how he would make Xbox and Microsoft Gaming software profitable. But he also linked Xbox to Nadella’s cloud computing vision by pushing for the company to develop a family of subscription services. The result was Xbox Game Pass, which arrived in 2017.

Game Pass was supposed to address a major shift in the industry in which game revenues were no longer following the familiar model established by movies, where most of the money is made in the first few months. Instead, many gamers were sticking with a smaller range of titles and spending more time in specific games, spreading revenues out over several months or even two years or more. This was good for big games, but problematic for smaller titles and the back catalog. And so Game Pass would provide Microsoft and third-party game publishers with a space place to put those games. It wouldn’t hurt individual game sales, and it provided a potential new revenue stream from gamers who might otherwise buy one or two games in a year but could now choose from a library of hundreds.

This still sounds like a good idea to me. It is, in fact, the strategy Sony still pursues with its PlayStation Plus subscription offering. But this also reminds me of the early days of the Netflix streaming service, which was originally a value-add to subscribers of the DVD mailing service and the home of hundreds of mostly terrible B-movies and worse.

Netflix improved that service dramatically over time, but the first notable change was the company investing in its own original series, with Lilyhammer, House of Cards, Orange is the New Black, Narcos, Stranger Things, all of which occurred before Microsoft released Game Pass. And perhaps it was that success which inspired Microsoft to take the next step with Game Pass too. Instead of being just a dumping ground for the games of yesteryear, Microsoft opted to go big. In early 2018, Spencer announced that all first-party Microsoft games would appear on Xbox Game Pass day-and-date with the retail releases.

This was a blockbuster move that immediately benefitted those who subscribed to Game Pass. And a string of high-profile game releases–Sea of Thieves, Crackdown 3, State of Decay 2, and Forza Horizon 4–quickly followed. And even bigger games releases, like new entries in the Gears of War and Halo series, would follow.

Game Pass was always meant to be cross-platform. In 2019., Microsoft added a PC Game Pass offering for Windows and a Game Pass Ultimate service that combined the Xbox and PC versions of the offering and added the Xbox Cloud Gaming cloud streaming service. Mobile was a problem, of course, thanks to Apple and Google enshittifying their app stores with anticompetitive blockers. But Cloud Gaming would help until regulators forced changes in the mobile market. And Microsoft’s later acquisition of Activision Blizzard would likewise help with mobile.

It would also prove problematic to Game Pass. For a few years, Microsoft cited a growing subscriber base, with over 25 million subscribers in early 2022. But growth slowed and stalled, and the current subscriber base of 34 million may represent peak Game Pass: I’ve been told by a trusted source that Game Pass has plateaued. Maybe everyone who may want a subscription already has one.

So what are the dynamics that led to this impasse. Two issues come to mind.

The first is that videogames are nothing like music or videos, despite them being distributed, streamed, and downloaded in similar ways. A customer with a Spotify subscription enjoys an unlimited collection of songs that can be mixed and matched in whatever ways they like. A customer with a Netflix subscription can binge a new series in a single night if they’re engaged enough, and then move on to the next one.

But Game Pass is different. Despite being described as “the Netflix of videogames,” Game Pass is (mostly) a download service, not a streaming service, and most videogames are very big and require long download times. Add in the fact that most gamers stick to a handful of titles each year, and the downloading problem is exacerbated: You can sample some titles quickly with Xbox Cloud Gaming if you have the Game Pass Ultimate subscription. But most don’t, and so most can’t.

The second is that Activision Blizzard and its many hit games and franchises broke the Game Pass revenue model. Microsoft infamously killed off its most popular Xbox Game Pass offering and replaced it with a new Game Pass Core subscription that doesn’t include new first party games day-and-date with their retail releases. This perk is only available now with the most expensive subscriptions, undermining the Game Pass value proposition. Game Pass is a lot iffier now than it was before the Activision Blizzard acquisition.

Ironic? Maybe. But Microsoft should have known this would happen, and it certainly had enough time during the regulatory process to do the math. But here we are.

❎ So, what’s is Xbox?

I say and write this a lot, but I feel like Xbox is in a holding pattern right now, stuck because of a confluence of factors, some self-inflicted and some external and beyond blame. Today, Xbox is hardware, games, and subscription services. And at a high level, it probably always will be. But as we think about the changes we know about and the educated guesses we’re forced to take about the future, nothing is clear. Can Microsoft revive the Xbox brand? Can it do so by killing off its unprofitable first-party hardware? Or is this business better off as a game publisher, maybe a company that might normally be called Activision Blizzard? These are unknowns. And our views will shift as time passes and we learn more. The recent layoffs, studio closures, and game cancellations are disheartening. But this isn’t the end of the story.

More soon.