Redacted: PlayStation 5 Reveal (Premium)

Microsoft’s reaction to the Sony PlayStation 5 reveal in early 2020 is among the many fascinating aspects of the recent blockbuster Xbox leak.

To put this in context, Sony announced in October 2019 that it would launch its next-generation PlayStation 5 video game console in time for the holiday 2020 selling season. Then, the following March, the firm fully revealed the technical specifications of the PS5. Our observations at the time were that the Xbox Series X would feature nearly identical specifications, though the PS5 would allegedly have much higher I/O throughput. And we noted that the PS5 would support standard M.2 SSD for storage expansion, a feature missing from the Xbox consoles (which require expensive proprietary storage expansion cartridges).

Microsoft, meanwhile, announced the Xbox Series X in December 2019, and it revealed the console’s specifications in March 2020, two days before Sony’s PS5 reveal. It then addressed Sony’s throughput advantage in July 2020 when it revealed its DirectStorage technology. This, Microsoft said, would improve the Xbox Series X’s X 2.4 GBps of raw I/O throughput by 2.5X, for an effective I/O throughput of 6 GBps. The PS5, meanwhile features PS5 5.5GBbs of raw throughput and 8 to 9 GBps of compressed throughput. Microsoft message? The I/O throughput would, in fact, be comparable.

With all this in mind, consider the conversation in the internal email exchange quoted below. It includes Microsoft CEO Satya Nadella, Xbox chief Phil Spencer, and others, and it details Microsoft’s reaction to Sony’s May 2020 reveal.

“I know I shouldn’t but I can’t help myself,” Mr. Spencer writes. “We’ve all lived with 7 years of starting off a generation with a price and performance (and messaging) disadvantage to PS4 with Xbox One. I have to admit this morning when I woke up knowing the PS5 reveal was today that the stress level was higher than normal. Now after almost 12 hours of soaking in their unveil, taking apart their specs, and looking at the community responses, I just wanted to say that I’m proud of our team.”

Given the history that has occurred since then, this bit is particularly incredible.

“We have a better product than Sony does, not just on hardware but equally important on the software platform and services on top of the hardware. We have the ingredients of a winning plan. I felt the feedback from the BoD [board of directors]’s discussion on being too confident and maybe this will just reinforce that perception. I get the need to be humbly confident but today was a good day for us.

“We haven’t won anything,” he continues. “And I know we have hard discussions about pricing, P&L [profit and loss], investments, etc. This mail isn’t trying to scoop any of that, those discussions really matter. But we can take confidence in our product truth here and I do believe any conversation needs to start with believing in that. This was a good day for Xbox. Thanks for indulging me.”

Here, Spencer was responding to two things, an email from Microsoft board member Liz Hamren in the wake of the Sony reveal, and a recent Xbox presentation to Microsoft’s board of directors. Let’s look at the latter first, as it occurred first, on Monday, March 9, 2020.

Spencer’s presentation to the board, simply titled “Gaming Board Presentation 2020,” laid out his assessment of the video game industry and Microsoft’s growth opportunities.

Much of the presentation focused on the obvious, that gaming is a huge market and opportunity, with 1 in 3 people worldwide, or 2.6 billion people, playing games. At the time, he saw a total addressable market (TAM) of $158 billion, with Xbox content and services delivering $158 billion of that and projected growth of 7 percent between fiscal year (FY) 2020 and 2023. Game video—via Mixer, go figure—delivered $16 billion in revenues and should grow 26 percent in the same time frame. (Microsoft killed Mixer just four months later.) Xbox hardware hit $12 billion in revenues but that was expected to fall 4 percent in the next three years. And Cloud streaming (xCloud) lost $1 billion, but it was expected to grow 105 percent.

Microsoft was still bullish about xCloud at that time, “xCloud has the potential to reach 2 billion players across the planet on every computing end-point,” the presentation noted. “Estimated to be biggest game Cloud streaming service globally.”

As for key Xbox differentiators, Spencer highlighted content, community, and the reach of cloud computing. Xbox had almost 17,000 game titles by that time (presumably across all console generations), 15 in-house game studios, 6 in-house game franchises with lifetime revenue of over $1 billion, and 3900 third-party developers (with 149 percent growth since 2015). Xbox was the number one consumer brand with Gen Z, he said, and 139 million overall users at the end of 2019 (up 17 percent year-over-year). And Microsoft had by that time invested $155 million in Azure-based game streaming infrastructure.

The platform, he added, was “membership.” Xbox Game Pass took 10 months to hit 10 million subscribers, and it then had 12.4 million subscribers. By comparison, Netflix needed 120 months to hit 10 million subscribers, while Spotify needed 70 months, Hulu needed 60 months, and Disney+ … well, Disney+ did it in just one day.

After discussing Game Pass engagement, Spencer moved on to the Xbox Series X and its holiday 2020 launch, the Xbox All Access offering (combining a console sale with 24 months of Xbox Game Pass Ultimate), and Microsoft’s renewed PC gaming push. Which, among other things, included a PC Game Pass advertisement in the Windows 10 Setup wizard and PC maker bundling. Project xCloud, he said, would let gamers “play AAA games on their mobile phone or tablet” thanks to Xbox Series X consoles in Microsoft’s datacenters in 27 of the 57 Azure regions worldwide starting early the following year. The estimated cost of this solution was $0.02 per hour, compared to $1+ per hour for NVIDIA GPUs.

He also warned of Google’s entry into cloud gaming with Stadia, though I suspect he also used this offering to help justify Microsoft’s cloud gaming investments.

As for Hamren’s email to Nadella and Spencer in the wake of the March 2020 Sony PS5 reveal, she expressed some optimism that there were no surprises and that the board felt good about Microsoft’s Xbox Series X offering.

“It is now evident that Xbox is the clear next generation technology leader, both in performance and next generation features, which are critical to enthusiast and developer audiences,” she wrote. “Broad consumer audiences will likely perceive the Xbox Series X and PS5 as roughly comparable. We have significant strength in backwards compatibility. Sony set expectations that the vast majority of the top 100 games on PS4 would be available on PS5 at launch, while we expect to have over 3,000 titles available at launch. We believe at the same price point we will fare well in head-to-head comparisons especially as we continue to shift the consumer mindset from console-only exclusives to ecosystem advantages/features.”

That bit is interesting because neither Microsoft nor Sony had announced the respective price points of their coming consoles. And where the cheaper Xbox Series S was still a secret—and, I believe, unknown to the Microsoft board too—Microsoft likewise didn’t yet know about Sony’s two-model strategy. A month later, Spencer said publicly that he felt “good about the price we will be able to get to” for the Xbox Series X and that team Xbox will “stay agile on our pricing”. Sony and Microsoft were, at the time, playing a game of pricing chicken. And dealing with component shortages that would threaten each product family’s launch.

Anyway, Hamren also listed the advantages that she felt Xbox would have over the PS5, including Variable Rate Shading (VRS) and Sample Feedback Streaming (SFS). But Sony’s SSD performance—“they have a 2x advantage,” she wrote—and off-the-shelf expandable storage were PS5 advantages. “Their approach to expansion is different from ours,” he added. “We have a custom expansion card while they are using a more standard NVMe m.2 SSD slot. No existing drives meet their required performance or physical form factor constraints, but in the long term, their approach may provide price advantage.”

As for Satya Nadella, he had only one comment on this entire discussion. And, humorously—especially for those who believe that any CEO is fully wired into everything his company is doing—one question for the two.

“This is really great to hear Phil,” he wrote. “Neither of us have announced pricing right?”

That message from Nadella, incidentally, came with a signature at the end: “Sent from Mail for Windows 10.” Incredible.