How do you "reset" Xbox?
Whatever happens, Xbox's future will (again) include big changes. And big cuts.
Asha Sharma said it clearly: Xbox needs a “reset”. For several reasons, which she described in a note published on the Xbox website and co-signed by chief content officer Matt Booty.
The first of these reasons, and perhaps the most important, is that Xbox is operating with a 3% margin, down from the previous year. A really, really low margin.
“Excluding Activision Blizzard King, over the past five years, we have spent over $20 billion on ongoing investments in our content, platform, and hardware subsidy, but our annual revenue has declined nearly half a billion during that time. Going forward, this cannot continue,” the note reads.
A second reason: Xbox is making a lot of games and yet many of them are not succeeding.
“We expanded our studio system when we needed a pipeline of content to meet multiple strategies across subscription, streaming, and devices,” Sharma and Booty wrote. “In the process, we have found ourselves over extended as we executed on changing strategies in a landscape of more readily available content. We are the fortunate stewards of industry-defining franchises that have enormous potential and player demand, but we have not adequately funded them to compete and win.”
The note also mentions the rising cost of producing consoles such as Xbox Series X|S. “When I joined as CEO in February, the price we paid for console storage components was over 2x as high as we paid last fall,” Sharma said. “These costs have since doubled again. And as we plan for the 2027 holiday season, we expect another significant increase, taking us over 5x the prices we paid only two years earlier.”
But the note makes clear that this is not only an industrial issue. Xbox is suffering more than its competitors because of “choices we made over the last half decade”. To the point where today “we are currently unable to make as many consoles as players want to buy”, and therefore need “a new business model and partnerships for hardware as we remain committed to Helix”.
Xbox is therefore ready to change - again - its hardware strategy, rethink its approach to production, and work more closely with third parties. To rethink everything, because the accounts need to improve. That is the mandate and that is the direction. Along the way, a few things will break.
In the short term, in fact, this will mean one thing: layoffs and closures. Bloomberg reported that in July - shortly after the end of the fiscal quarter on June 30 - Xbox intends to announce layoffs, although the scale is still unknown.
And it is becoming increasingly clear that several studios are not safe, including Ninja Theory, the studio behind Hellblade; Compulsion Games, the studio behind South of Midnight; and Double Fine, the studio behind Kiln, all of which risk closure.
In the meantime, Craig Duncan, who had left the leadership of Rare to manage Xbox Game Studios, has departed and Treyarch head Mark Gordon has chosen to “retire”.
The end of playtime
Sharma and Booty’s note was joined by comments from the CEO of Microsoft, Satya Nadella. During the New York Times’ Hard Fork on June 10, he said:
“Still the challenge we have is we’ve not been monetizing that entertainment. In fact, if anything, we’ve been subsidizing that entertainment. In fact, there’s more monetization of Xbox games happening on YouTube than at Microsoft. And so that doesn’t mean we go do things that are unnatural. 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. So, I think Asha is really, 100 days in, and she put out a post saying in the next 100 days, she’s going to take a fresh look and make sure we deliver on what our fans expect of us both on the hardware side or on the publishing side.”
In itself, the fact that Nadella might at some point point to the nearly $70 billion spent on Activision Blizzard and say, “okay, now let’s start making the numbers work”, is not exactly new.
In June 2024, former Xbox CEO Phil Spencer said that “I have to run a sustainable business inside the company and grow, and that means sometimes I have to make hard decisions that frankly are not decisions I love, but decisions that somebody needs to go make.” And a few months earlier, interviewed by Polygon during the Game Developers Conference, he said: “We’re a business. I’ve said over and over. I don’t get any luxury of not having to run a profitable growing business inside of Microsoft.”
This is where the multiplatform strategy came from: buying more time, expanding the reach of Xbox games and securing more margin.
In short, Xbox has been under a very large magnifying glass inside Microsoft for years. The question, perhaps, is how we got to a situation where a “reset” of this scale is needed; a reset that looks like a meteorite launched by Xbox itself.
Activision covered the problems, but only for a while
The impression is that over the last seven or eight years, Xbox believed that investing a lot of money and gradually becoming bigger would be enough to increase sales, grow its ecosystem, improve things and potentially surpass PlayStation or Nintendo in hardware sales.
And so came the acquisitions of studios such as Obsidian, Double Fine and Ninja Theory. Then, in 2021, in the first major scaling up of these operations, came ZeniMax (and therefore Bethesda). And then, the following year, the final act: Activision Blizzard.
Each time, the scale increased. And each time, with it, came higher expectations for growth, which were duly missed; higher revenue targets, duly missed; and higher Game Pass subscriber numbers, duly missed. At one point, even Nadella’s salary was tied, to a small extent, to Game Pass growth. Until it became clear that it was better to drop the idea.
You know all those times we criticized Amazon or Google, pointing out how these huge tech companies - giants of ecommerce, web search and mobile - kept showing that spending hundreds of millions of dollars is not enough to succeed in this industry?
Well, to me, it seems Xbox did exactly that for years. And for years, it has been trying to get back on the road. But frankly, I am surprised Xbox has reached this point.
Because Amazon and Google, at least, had one thing on their side: they did not know this industry from the inside. Yes, Amazon has owned Twitch since 2014 and Google makes a lot of money by taking 30% from purchases on the Play Store. But publishing games, or even directly developing them, with everything that means when managing a multi-year project of this kind, is another matter entirely.
But for this to be happening to Xbox - after 25 years in the industry and four generations of consoles - leaves me stunned.
Because it would be like saying that, in these 25 years, Xbox has not understood how the world of video games works well enough to adapt. Despite being a major actor in the industry since 2001.
In recent years, since the end of 2023, the acquisition of Activision Blizzard has covered up structural problems that were emerging and taking root. It covered them with a sudden influx of revenue, driven precisely by the integration of another publisher. But that influx ended quickly, revenue growth slowed; and including Black Ops 6 in Game Pass last year was the bitter cherry on top of a cake that was falling apart in the sun: hundreds of millions of dollars lost in missed sales and yet another hole for Xbox.
When Sharma arrived, she understood that a few walls had to be knocked down in order to renovate.
Once again, as we have been doing for years, we are facing yet another promise from an Xbox executive that “now we change everything and get back on track”. In the past it was Spencer; now it is Sharma, who seems ready to do whatever it takes to fix things.
The point is that Gears of War: E-Day or Clockwork Revolution not coming to PS5 may please some people and annoy others, but it does not hurt anyone. What worries me more are the massive cuts Sharma is willing - perhaps forced - to make for her “reset”. And what will happen afterwards.