Since the early 2000s — with the massive success of the original Xbox gaming console — many gamers have had a mental conception of a three-way “console war” between Microsoft (Xbox series), Sony (PlayStation series) and Nintendo. As of last year, this conception seems well-founded, with statistics indicating that they all have similar market shares. But Xbox’s position in this “war” has recently been called into question by a major figure: Microsoft Gaming/Xbox CEO Phil Spencer.
…Wait, what?
In a bizarrely (sometimes uncomfortably) candid video interview from last month, Spencer repeatedly admits that Xbox does not have a realistic path to earning a dominant share in the console market.
A few highlights include:
“We lost the worst generation to lose in the Xbox One generation.”
“I see commentary that if you just built great games, everything would turn around. It’s just not true that if we go off and build great games, all of a sudden, you’re gonna see console share shift in some dramatic way.”
“We’re not in the business of out-consoling Sony or out-consoling Nintendo. There isn’t really a great solution or win for us…”
What is going on? It is not exactly standard practice for the CEO of a publicly-traded company to step in front of an audience of millions and say: “we lost, it’s over.” And that certainly feels like the message here, especially given the strangely pessimistic ethos with which Spencer delivers it. But business, especially at this scale, is never so straightforward; a closer examination is required.
First, what do the numbers say? Microsoft’s annual report shows that Xbox hardware sales are down a dramatic 30% this quarter. But… overall operating income is up 10%, and the overall revenue marks the second best third quarter in Xbox’s 22 year history.
Xbox’s parent company, Microsoft, is a giant in the technology industry — not for their hardware, but for their operating system software, which runs on nearly 3 in 4 PCs globally. It seems Xbox is also moving towards — or at least, apparently, needs to be moving towards — a software focus. One major example of this is the company’s recent increased focus on the Xbox Game Pass subscription service (functional on both Xbox consoles and PCs) which has enjoyed great success. With Xbox’s purchase of several major game studios at the turn of the decade (and an ongoing, legally challenging attempt to purchase Activision for nearly $70 billion), Xbox seems fit to pivot to a focus on software and enjoy success without needing to win the “console war.”
Despite these prospects, Spencer’s pessimism is not entirely unfounded. Xbox still needs to prove its competence as a software enterprise. While Game Pass is going well, it is less clear that Xbox can effectively manage their recently purchased studios, and early indications are not promising. The recently released “Redfall” from Xbox-owned Arkane Studios was a critical and financial disaster.
Spencer acknowledged this failure in the earlier mentioned video interview: “We let a lot of people down this week with the launch of [‘Redfall’].”
If Xbox is to successfully pivot to a software-focus, they will need to quickly figure out how to effectively manage their studios. One indicator of their progress on this front will be the upcoming “Starfield,” a highly anticipated release from Xbox-owned Bethesda (in stores Q3 of this year). If “Starfield” can earn good sales and reception, Xbox can recover the confidence of fans (and investors) lost after “Redfall.”
In the end, only time will tell whether Spencer’s lamentations were reactions to transient growing pains through an ultimately successful business pivot or harbingers of Xbox’s downfall. The embarrassing failure of “Redfall” does create some legitimate cause for concern. However, given Xbox’s stellar track record with “Game Pass,” and the presence of a massive capital safety-net (granting room for mistakes)… my money (and Microsoft’s) is on Xbox’s success.