The End of Consoles? (Premium)

Thanks to the failure of the Xbox One, Microsoft’s videogame strategy has shifted dramatically in recent years. But this past week, the firm came clean. The future of Xbox lies not with standalone consoles but rather with the people who play games. And that’s true no matter where they prefer to do so.

It used to be so simple. Videogame fans who wanted to sign-up for Microsoft’s take on this market simply bought the newest Xbox, which for most of this platform’s existence, was a standalone, dedicated console.

But a lot has changed over the past 20 years.

When Microsoft announced the first Xbox, Bill Gates was still the chairman of the software giant he had cofounded, and the hardware was a thinly-disguised Intel x86-based PC, a “DirectX box” that would make up for the failure of the firm’s previous partnership with Sega on the Dreamcast. But subsequent hardware generations seesawed wildly between hardware architectures, with the Xbox 360 adopting PowerPC chipsets in 2005 and the Xbox One arriving with AMD x64 chipsets in 2011.

While Nintendo and Sony had had decades to build up enthusiastic fan bases and exclusive franchises, Microsoft, as the newcomer to this market 20 years ago, needed to work harder just to be an also-ran: In the first three generations of consoles in which Xbox competed, there were some software hits, like Halo and Forza, but Microsoft’s hardware never performed particularly well. So Microsoft, even more so than Nintendo and Sony, had to worry about retaining fans as much as it did with earning new customers.

One approach to doing so was backward compatibility: Despite the different hardware architectures, Microsoft worked to ensure that some library of games from previous-generation consoles could be played on the new Xbox hardware. How it did so is sort of beside the point, but this work became the cornerstone of Microsoft’s gamer-centric strategy changes in the wake of the Xbox One debacle: That console wasn’t at all competitive from a unit sales perspective, triggering fears that Microsoft would drop or spin off the platform.

That didn’t happen. The Xbox One launched the holiday season before Satya Nadella became Microsoft’s third CEO, replacing Steve Ballmer. A veteran of Microsoft’s commercial and cloud businesses, Nadella shouldn’t have been particularly interested in videogames. And he quickly required the businesses within Microsoft to justify their existence financially, leading most infamously to the death of Windows phone in 2015.

But Nadella surprised us all. He agreed to purchase Minecraft and the company that made it for $2.5 billion in 2014, and he bought into Phil Spencer’s vision that Xbox could be a cornerstone of Microsoft’s then-emerging future as a cloud computing superpower. Microsoft might never be successful selling Xbox hardware---its console business has never made a profit---but it could leverage its acumen in cloud computing and AI to beco...

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