Xbox Was Enshittified From Within ⭐

As I had long suspected, it’s the bean counters at Microsoft that are working to destroy Xbox from within, and not Xbox leadership. But this is a healthy reminder that we all answer to someone. And that when it comes to pointing the finger of blame, it’s important to find the right target.

That target is Microsoft CFO Amy Hood.

A credible report in Bloomberg co-authored by Dina Bass, an investigative journalist who I trust explicitly, confirms a growing worry I’ve had, not just about Xbox, but about Microsoft more broadly. And that fear is that the control of this company has shifted from its CEO and board of directors to the person who arguably is more important to its recent successes than anyone.

That requires a bit of explanation. But only a bit: If you look at Microsoft’s meteoric financial rise over the past decade, especially in its stock price and thus in its overall market value, a few things become obvious. None of this is tied to the success of particular products.

Almost all of it is instead tied to financial manipulations and a steady scaling back of transparency so that shareholders and Wall Street no longer have any insight into where the money Microsoft makes is coming from and how much it is really spending on money-losing products that it sees as potential future successes.

Amy Hood became Microsoft CFO in mid-2013. Satya Nadella, who is incorrectly credited for the company’s successes over the past decade, became CEO in early 2014. He was always a curious choice for this role, at least to me, but he had been at the software giant for over a decade by that point—his previous employer was Sun Microsystems—and had risen through the ranks to become a senior vice president of the Online Services division and then the president of the Server & Tools Division over the previous several years.

My view of the Nadella ascension was that he was an engineer, and this marked the return of a technologist to the helm, which is vaguely good for a company like Microsoft. But in watching several Steve Ballmer interviews this past year, a different story emerges. Aside from the facts I did know—it was Ballmer and not Nadella that kicked off the cloud-first strategy that drove the coming decade of successes—I learned that Nadella was a necessary sell job for Wall Street. Analysts and shareholders were too used to Ballmer and wouldn’t have believed that he could drive change at Microsoft as it transitioned into a cloud computing superpower.

The problem is that I, like many others, view Microsoft as if it were a technology company. My biggest issue with the company over the time frame discussed above is that it shifted its focus to something I do not care about, enterprise computing in the cloud, relegating the Microsoft products and services I do care about to the back burner. Worse, as the focus changed, the enshittification of those products and services I do care about gathered steam and then exploded. It was like there was no adult supervision. Or so I thought.

The problem was, and is, that there is adult supervision. And while neglect is bad, the arbitrary and malicious destruction of a once-great business is worse. That was true with Windows, and it’s still a pain point. And now we know it’s true with Xbox—or perhaps we should just call it Microsoft Gaming—too.

When Nadella took over as CEO, he engaged in a process that is common to new leaders in any company: He had the leaders of the various businesses parade before him to justify their existence. These people had to meet two bars. The business had to be independently financially successful or at least have a plan to get there. And it had to make sense within Microsoft’s new direction, which was cloud services tied to predictable, monthly subscription or licensing fees.

In retrospect, I’m embarrassed that I didn’t see this before. But that first requirement can’t have come directly from Nadella. He’s not a financial wizard. It had to have come from Hood, who is, and as a new CEO, he did rely on a group of trusted advisers, each an expert in some part of the business. But he didn’t so much delegate this responsibility as he did hand it off and then never look back. The Microsoft of the past decade is about raging financial successes with no clear indication where the money is really coming from.

Nadella’s requirement that businesses make sense within Microsoft’s new corporate strategy, cloud computing, was somewhat controversial, but it at least seemed to play to the company’s strengths. And most of the businesses with Microsoft did and so aligned with this strategy pretty well. Office, for example, morphed into what we now call Microsoft 365, a superset of the old Office but with a very different business model. Windows, infamously, did not.

But Xbox did too. Thanks to Phil Spencer, Xbox was sold as a platform that could transition, as Office had, to a new business model in which the financial spikes caused by the occasional console or blockbuster game release and interstitial lows could be smoothed out by monthly subscription fees. From 2002 through 2017, Xbox had a single, low-cost subscription, Xbox Live Gold, which cost $50 per year. Today, Xbox has four, though it has eliminated the perks that made these offerings special and raised prices continually. The cheapest Xbox subscription at the time of this writing costs $120 per year and the most expensive is $360 per year. Fans are reeling and it’s almost impossible to make sense of this enshittification.

But now Microsoft is all-in on AI, is, in Bill Gates’s oft-repeated words, betting the company on AI. Nadella has again pushed the entire company to follow him in lockstep, like some mad Pied Piper, down this new path. And this time, it’s gotten aggressive: Through leaks and published disclosures, we know that those inside Microsoft who oppose this shift have been told they’re welcome to leave the company and find work elsewhere. Microsoft is all-in on AI and if you’re not, you can go. We’ll find someone else who’s on board.

The Bloomberg report noted up top is not about AI. That’s the public-facing strategy. No, this report is about financial manipulation, Microsoft’s true strategy, and the way it can leverage its market power to accumulate the mountains of cash it needs to pursue the AI agenda. This is potentially lucrative as a market, we’ll see. But a soft form of Big Tech abuse is that these companies can afford to do things most companies can’t. And throwing away over $20 billion a quarter to build out a datacenter infrastructure it may not even need in the near future is the type of “investment” most companies cannot make.

The need to hide where the money is coming from and going has led to what in retrospect is an obvious conclusion: Businesses within Microsoft are now being asked to meet absurd financial goals. And those that cannot will have to cut corners. This is a delicate dance, and you can see what happens when you get it wrong in the recent console and Game Pass price hikes. At some point, you cut and cut and cut and then it impacts customers, people who are in this case enthusiastic fans of a platform that is now letting them down on a fairly regular basis.

We have a word for this change: Enshittification. And it was clear with the price hikes, coming as they did in the wake of repeated layoffs, studio closures, and game cancellations, that Xbox had become enshittified. What the Bloomberg report provides are the details.

This is both sobering and troubling: Xbox/Microsoft Gaming is being forced to meet an arbitrary profit margin of 30 percent. This in an industry in which the average profit margin has been 17 to 22 percent in recent years. And that doesn’t account for the hardware, which isn’t just a low-margin business but is in fact a money loser. Videogame companies that make consoles have to eke out their profits over time from licensing associated with third-party game sales. As recently as the 2022 fiscal year, the Xbox business had a profit margin of 12 percent.

Just to be clear: 12 percent is a profit. It’s a double-digit profit. When you factor in the expense of having just released two new money-losing consoles, Xbox Series X and S, a 12 percent profit margin is borderline miraculous.

But not to Amy Hood. She has cast her Sauron-like gaze on this business, still in the throes of assimilating Activision Blizzard at a cost of $88 billion and untold complexities, and has decried that They. Will. Do. More. Not more games. More cutting. Until it can somehow get to a 30 percent profit margin that simply does not make sense for this type of business.

The Bloomberg report notes that only a few software-only game studios ever reach a 30 percent profit margin Those lucky few, we’re told, are “really nailing it.” Xbox was never in that hallowed hall. But do you know who was? Right. Activision Blizzard, a company that refused to put its game titles into Game Pass or any other subscription service because just selling games outright was so lucrative. In its last fiscal year as a standalone company, Activision Blizzard reported an operating margin of 37.9 percent. The year before that, it was 44.5 percent. (Operating margin and profit margin are not synonyms, I know. But close enough.)

Phil Spencer wanted to sell a first-party Xbox gaming handheld this year, but Amy Hood said no. Xbox was forced to raise the prices of its consoles, twice in the U.S., during this same time period. And we’ve had zero meaningful hardware upgrades, unlike with Sony and Nintendo consoles, making an unprofitable hardware line even less desirable to potential customers. These are the types of decisions that are made when one only evaluates the finances and ignores the important intangibles. One being how far Microsoft can push Xbox fans before they finally just say no and walk away forever.

I am fascinated that Microsoft felt compelled to comment on the Bloomberg report.

“We look at the business as a whole, balancing creativity, innovation, and sustainability across a diverse portfolio of offerings,” the Microsoft statement notes. “As with any creative business, sometimes that means making hard decisions and stopping work on things that are no longer working for a variety of reasons, and shifting resources toward the projects that are more aligned with our direction and priorities.”

The problem, of course, is that Microsoft’s direction (AI) and priorities (financial manipulation) stand in sharp contrast to the aims of Phil Spencer and Xbox leadership, not to mention the fans that turned Xbox into a viable business in the first place. But that just brings us full circle: Xbox has been enshittified from within by Microsoft. This is being done solely to meet arbitrary financial goals created by someone outside the gaming industry and that business. And it’s being done to secretly help finance Microsoft’s insane AI push. Which may or may not go on to be known as “Satya’s Folly” when the dust clears on that mess.