Report: Microsoft is Considering Multiple Options to Turn its Xbox Business Around, Including a Spin-Off

It looks like the good Xbox buzz generated by last week’s Games Showcase didn’t last very long. There was first the publication of Xbox CEO Asha Sharma’s email to employees, where the exec admitted that the Xbox business “cannot continue” to operate with its current 3% accountability margin. Then, there were two separate reports from Bloomberg and The Verge mentioning upcoming layoffs and possible studio closures.

Yesterday, a new report from The Information continued the streak of worrying news by revealing that Microsoft is considering more radical options to fix the business than just layoffs and streamlining its many studios. “As Microsoft gets ready to overhaul its struggling Xbox gaming unit, it hasn’t ruled out spinning out or restructuring the unit as a wholly-owned subsidiary, which could make it easier to sell, or creating a joint venture with other partners,” the report claimed, citing three people with direct knowledge of the discussions.

While Microsoft reportedly “doesn’t have any imminent restructuring plans,” the company may well look at how it managed its acquisitions of LinkedIn and GitHub before considering more dramatic changes. “Microsoft operates LinkedIn and GitHub as wholly owned subsidiaries, which could serve as one potential blueprint for Xbox, one of the people said,” the report reads.

The Information also learned that Microsoft CEO Satya Nadella and CFO Amy Hood approved Sharma’s plan to “spend more on top-tier games in the coming fiscal year beginning in July, although the budget is not yet locked in and could change.” The new Xbox leadership team reportedly plans to “move faster on developing new games from beloved franchises it owns, including Halo, Fallout and Elder Scrolls.”

It’s not immediately clear how Microsoft making Xbox a wholly owned subsidiary, turning it into a joint venture, or spinning it out entirely could really improve the fundamentals of the business, however. Yesterday, a separate report from Windows Central’s Jez Corden revealed that “Xbox is losing not dozens, but more in the hundreds of dollars per Xbox Series X|S console sold right now” due to memory and storage price increases.

It also doesn’t help that many of Microsoft’s recent first-party games underperformed financially. “Games like Avowed, Keeper, Kiln, South of Midnight, Hellblade 2, Forza Motorsport (not Horizon), and The Outer Worlds 2 didn’t come within range of expectations set by Microsoft’s spreadsheets, I’m told — either in terms of raw sales on external platforms or via Xbox Game Pass engagement and retention data,” Corden reported yesterday.

During a live event in San Francisco yesterday with Hard Fork, The New York Times’s tech podcast, Microsoft CEO Satya Nadella had some words about the current state of the Xbox business. And again, it’s quite hard to be optimistic despite Microsoft spending billions of dollars on studio acquisitions in recent years.

“No one can accuse Microsoft of not having invested for the last 25 years. And now we have to turn this into a sustainable business that delivers what is fundamentally one of the best sources of entertainment. The challenge we have is we’ve not been monetizing that entertainment. In fact, if anything, we’ve been subsidizing that entertainment,” Nadella said yesterday.

“We want us to do what is really our job, which is to build great games, build great hardware, but we’ve got to do it in an economically sustainable way,” Nadella added. Whether it’s actually possible for Microsoft to do that in our current economy remains to be seen. Anyway, we’ll have a clearer picture of how the new CEO of Xbox plans to “reset the business” over the next 100 days.