Chapter 1: What is the main topic discussed in this episode?
Hello and welcome to Decoder. I'm Neil I. Patel, editor-in-chief of The Verge, and Decoder is my show about big ideas and other problems. Today, let's talk about the future of Xbox. Phil Spencer, the CEO of Microsoft Gaming and a two-time Decoder guest who's led Xbox for more than a decade, just resigned. But in a shocking twist, his deputy and long-assumed successor, Sarah Bond, is also out too.
And Microsoft Gaming is now in the hands of Asha Sharma, one of Microsoft's AI executives with no prior game industry experience. It's a major leadership transition that suggests Microsoft wants to make serious changes to its gaming division, which owns franchises like Halo, Call of Duty, and Minecraft.
There's literally no better person to talk about all this with than Tom Warren, a senior editor here at The Verge and author of the excellent newsletter Notepad. Tom just had a new baby. He's actually out on parental leave right now.
Chapter 2: What triggered the recent leadership changes at Xbox?
But Microsoft has a long habit of disrupting his time off with major news. So Tom was gracious enough to come back on the show after he published a major scoop about what exactly went down at Xbox this past week. There's a lot to say about Xbox.
The story of the console and Microsoft gaming is a complicated one, with a lot of twists and turns since that first Xbox console made its big splash in the industry 25 years ago. But for a majority of the time since, it's been stuck in third place, behind Nintendo and PlayStation. That's a surprising thing to say for a division of a company worth trillions of dollars
and also owns some of the most celebrated gaming properties in all of entertainment. And so Phil Spencer, who started at Microsoft in the late 80s and took charge of Xbox in 2014, was given the job of trying to turn things around. Since then, he has tried many things.
The Netflix-style Game Pass subscription service, a major push into cloud gaming, buying Activision Blizzard King, which makes Candy Crush, and many, many different iterations of Xbox hardware. As of last year, he even had plans to bring Halo to PlayStation, something game industry insiders thought was basically impossible just five years ago.
But as you'll hear Tom explain, the game industry has been changing faster than Xbox has been able to transform itself, and almost none of Spencer's strategies have ever really clicked. Xbox is still far behind Nintendo and PlayStation, and in PC games, it still stands in the shadow of Valve, which runs the dominant Steam store and now makes the Steam Deck handheld.
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Chapter 3: Who is Asha Sharma and what does her background mean for Xbox?
Microsoft has spent tens of billions of dollars trying to acquire its way to a stronger position against the rise of games like Fortnite and Roblox, mobile giants like Tencent, and a zero-sum war for attention dominated by apps like YouTube, Instagram, and TikTok. and yet it has very little to show for all of that.
And so today, Phil Spencer's grand vision of 100 million Game Pass subscribers streaming Xbox games to whatever screen they want on a cloud platform, well, that feels out of reach. But as Tom says, it's not lost forever. Xbox is far from dead, and there's hope that new leadership will take some big swings and make something happen again.
Okay, here's Verge senior reporter Tom Warren on the future of Xbox. Here we go. Tom Warren, you're a senior reporter at The Verge. You are currently out on paternity leave, but Microsoft just brought you back.
Yep. This happens every time I take a vacation or leave. Microsoft decides we're going to do something massive and ruin Tom's life.
It's just punishment for all of the scoops you have dropped on the company over the years. So this week, as you were playing with your beautiful new baby, Microsoft initiated a major shakeup at Xbox, something we've seen coming for a little bit, but maybe not on this scale or this magnitude. Describe what happened at Xbox this week.
Phil Spencer, the longtime CEO of Microsoft Gaming, technically, but Xbox chief is what he's known as. He's retiring, so he's leaving Microsoft. Sarah Bond, the Xbox president, is also leaving Microsoft. And then they're actually promoting Asha Sharma, who used to be on the core AI side at Microsoft, to the CEO of Microsoft Gaming, so replacing Phil Spencer, essentially.
So, yeah, big news, a big shake-up, should we say, of Xbox, which I think has been, I think with Phil Spencer, it's been a long time coming, right? I think Xbox fans have expected that retirement, but perhaps not so much Sarah Bond leaving, so...
And this is, I think, the shakeup, right? We knew Phil was going to retire. He'd been messaging that for some time. He's been there for a long time. He's a Microsoft lifer, really. Phil's been on this show before. We're going to run some clips from his past interviews on Decoder because I want to get your take on what happened between those interviews and now.
But at just a very high level, we knew Phil was going. Is it that everyone expected Sarah to be his successor and that didn't happen and that's the surprise here?
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Chapter 4: How has Phil Spencer's leadership impacted Xbox's strategy?
acquiring Activision, doing all the other acquisitions of the studios they've done. I look at this and I say, well, it doesn't matter if Sarah was the best manager or the worst manager, the strategy that she was instrumentally a part of failed.
And I kind of see this and I say, okay, if I'm such an Adela or importantly, Amy Hood, the CFO of Microsoft, I'm saying we've done some of the biggest acquisitions in history, certainly the biggest acquisitions in Microsoft history, but And none of this came to anything. We got to reboot this whole thing. Does that feel as important inside Microsoft as maybe Sarah wasn't the right person?
It's a couple of things, right? So obviously Microsoft came in as balloon now, right? Because it's got Bethesda, obviously Activision Blizzard has made it bigger than ever before, right? And then you've got this tension of... Microsoft get like the corporate Microsoft of Satya Nadella and Amy Hood putting the pressure on that new division to, you know, return.
return the money that they've invested into into this project essentially so through profit margins um so they've cranked that pressure up over the past couple of years and it's forced phil sarah everyone under them to then respond right so they've done these studio closures they've done cuts they've done price increases they've tried to accelerate um you know get getting more people using export services essentially so that became the strategy of like okay we need we need to
get to tvs we need to get to mobile and all this stuff and there was a lot of like I guess trying to rush that, it felt like, and forgetting that the console was their base of building up Game Pass and their base of taking those people and perhaps moving them elsewhere and user acquisition, growth, all that sort of stuff.
And it just feels like they tried to rush that and they did this, this is an Xbox campaign, which was just super strange. It was trying to say that a phone was an Xbox and it was born in this idea that They need to speed up the margins. They need to get more revenue, get more growth and improve those margins, essentially.
So when you're trying to pin blame on whoever it is, it's like it comes from the top. Satya and Amy, they're pushing these margins. And I think they're slightly unrealistic in the context of gaming anyway. There's not the margins that Sony has, for example. They've put the pressure on. Phil has, I think he's kind of stepped away a little bit over the last couple of years.
So not so laser focused on Xbox. And then that's allowed Sarah to have a lot of power over Xbox and accumulate like marketing power and do the, this is the Xbox campaign in her own org. And then just, yeah, it just hasn't gone well. It hasn't gone well for consoles. Even if you argue that Microsoft perhaps doesn't care about sending consoles, which...
Maybe they don't, but I think they probably thought that they could replace them with cloud and mobile a little bit quicker.
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Chapter 5: What challenges has Xbox faced in the gaming industry?
It's this whole strategy failed and now we're going to try a new one. And I'm just curious if you have insight into the balance, right? How much is the strategy failed, we just need a new regime versus we need a new strategy and Sarah specifically cannot execute a new strategy?
I don't think they're going to change the strategy all that much because the strategy kind of makes sense in a way. Like you want to get to mobile, you want to get to cloud, and that's how you're going to get more users, right, ultimately into your system without not selling enough consoles, essentially.
So I don't think the strategy is terrible, but I think the execution has been over the past couple of years. I think that's been the problem predominantly is the execution of the strategy. The messaging publicly has been pretty bad. So I think it's more a regime change that's needed to bring some sort of element of people who understand user acquisition, right? Yeah.
And I think that's kind of where Azure's coming in.
We need to take a quick break. We'll be right back.
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Chapter 6: Why did Xbox's Game Pass strategy struggle to gain traction?
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Hi, everyone. This segment of Decoder Sessions features my boss, Helen Havlak, the Veritas publisher, and L'Oreal Group's Global Vice President of Tech and Open Innovation. I think you're going to enjoy this conversation.
We're going to start with a Decoder classic question, Guy. What does tech and open innovation mean at L'Oreal? Who is on your team? What kind of projects do you work on?
Open innovation is all the partnerships that we have in L'Oreal working with startups outside. And it's really a great time right now to be doing open innovation because we're doing things in vertical farming and sustainable cultivation and biotech. So we do all those partnerships and our team is responsible for them.
And the augmented beauty team is all the tech that started 15 years ago when we kind of had a blank page and now how can we bring beauty and tech together?
How do you decide which projects to invest in?
At the beginning, I was trying to push as much as I could to get people to think that beauty was relevant for tech. So we're really tech centric. And then over time, we started thinking about how to look more at beauty products that we can upgrade thanks to tech. And so we have a little bit more kind of. process behind how we choose projects now.
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Chapter 7: What role does AI play in Microsoft's future gaming strategy?
So that completely knocked them back. Even when they were trying to play test it, Apple were on the test flight saying, no, you have to change this. It was very... They were very... restricted in what they can do. So that kind of put their strategy back. Now, who you blame for that?
I think you can blame Apple in a very significant way. There's like pretty major antitrust ramifications of that, but Apple is still feeling it.
And then fast forward from that point, from launching xCloud and having all those issues to a couple of years ago, they're still trying to get that resolved, right? They're still trying to push for this app. They're still trying to get a store in there now, essentially is the idea. They're going to have an exports mobile store. So we've moved on from...
you know, having an Xbox cloud gaming app, it's more ambitious. Now we want to do a store. We want to sell content in there directly to people. Um, and there was the promise that that was going to arrive from both Phil and Sarah, to be fair. Um, but then Sarah then promised they was going to launch in a month in an interview. And that was two years ago.
So, and it hasn't happened a lot of that, um, idea of going for, for, for mobile recently and, and trying to do this cloud store thing. Um, has just been over-promising and under-delivering and relying on regulatory change that just hasn't come, right? Or it's come and whoever's, you know, whether it be Google or Apple, they've appealed, right? We just pushed it down so many months.
So, yeah, so they've had all these hurdles with this strategy. But I think... Ultimately, Game Pass has a problem where it fundamentally will eat into those margins of studios. And it's like, if they can't scale it up, then they have to increase the cost of it. So again, we saw that last year. They've been up like 50% Game Pass Ultimate.
So they've been doing all these things where they respond to this strategy with a goal of either... increasing the revenues or scaling up. And it just hasn't been going smoothly, let's be honest, especially over the past couple of years.
So it's really funny.
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Chapter 8: How does Xbox plan to address its content and hardware challenges?
So when Phil Spencer was on the show in 2022, I asked him about this vision that the future of Xbox is Netflix. Here's what he had to say. Then there's the other part, which is, man, it would be really cool if everyone just paid us $15 a month all the time.
And the games came out and everyone was just happy and that base of revenue was recurring and it was a little more stable than hits, than console generations. Is that the move? Because that seems like where you have been building for a long time, but it's harder to get there than maybe anyone anticipated.
We don't have this... vision of everybody's paying us $15 a month. We think the subscription is an interesting business model for certain kinds of games and for certain customers. But I really see it as diversifying the way people build their library of games or creators can reach the customers that they want to reach with the content that they build.
But it will always be part of the business in my view. I think people buying their games and owning their games will be an important part of the business for years and years to come.
To be fair, I heard that line at the beginning of the streaming transition in music very famously from Steve Jobs. Actually, people like to own their music is a thing that he used to run around saying all the time. Now, I feel like we're hearing it from the games industry. Is that just the point on the curve that you're at?
Is some people are going to buy it and some people are going to stream and we're going to have one day five years and I wake up and it's all streaming and subscriptions or is it now?
Games are fundamentally different, and I'm definitely not smarter than people who did music subscriptions or video subscriptions. I just think the fundamentals of gaming are different. So subscriptions will be part of the solution, but not the only solution.
Even as Phil was saying that to me, I was thinking, I don't believe you, but you've gone all in on all of these moves. to get recurring revenue. And we were having that conversation in the context of them buying Activision. And Candy Crush is the most stable recurring revenue you can get. It's endless downloadable content. It's endless power-ups.
It's people paying money to literally play the game every day. Did you have the same reaction to them saying their goal was not to get to $15 a month from every single Xbox gamer?
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