How Microsoft is giving up on the video game console wars

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In mid-2014, Satya Nadella, who had just become the CEO of Microsoft, ushered the heads of the company’s gaming division into his fifth-floor office in Redmond, Washington.

Executives wanted Nadella to write a $2.5 billion check to buy Mojang, a Swedish company that had produced a blocky, pixelated game called Minecraft. Nadella asked why Microsoft, which Sony has consistently outdone itself in the console business, should keep investing in video games. How does that fit in with his vision of a company with a friendly face that attracts more consumers?

Then Phil Spencer, the new head of Xbox, told Nadella about the vast world of Minecraft where millions can socialize and where teens are encouraged to learn math and science skills. Spencer said the deal would be the first step in a “very bold vision” to turn Microsoft’s gaming business into one focused on a broader audience, rather than just players.

Nadella agreed and made the deal. What followed, according to interviews with more than 20 Microsoft executives, game developers, industry analysts, and gamers, was a years-long transformation. Instead of essentially competing with rival Sony to sell more consoles, Microsoft bought another 15 game studios and invested in new technologies, such as a Netflix-style gaming subscription service and a portable tool known as cloud gaming.

Now, as Microsoft gears up to show off new shows at its annual E3 gaming conference this weekend, its video game business looks very different. The company is still known for its Xbox, for which a new version was released in November. However, it has diversified beyond boxy hardware to offer a new set of services.

“Their strategy has diverged significantly from the traditional console approach,” said Pierce Harding Rolls, a game researcher at the analytics firm Ampere Analysis.

With the changes, executives and analysts said, Microsoft is betting that the future of gaming will be a post-hardware world where people may not want to spend hundreds of dollars on a console. Ultimately, they said, people may no longer be tied to specific hardware to play games, and will instead be more interested in software and services.

While Xbox consoles still generate a lot of revenue — in January, Microsoft reported $5 billion in quarterly gaming revenue for the first time, buoyed by the release of the Xbox Series X — the company stopped disclosing console sales in 2014. Tim said Stewart, Xbox chief financial officer, says it’s coming from content and services, rather than Xbox sales.

Its gaming business still faces hurdles, including undermining the perception among gamers that they don’t have their best interests at heart. This aversion stems from the messaging failure in 2013, when Microsoft introduced its new Xbox One console as an entertainment device that people could use to stream music and movies. In response, the players revolted.

Analysts estimate that the Xbox One still sells about 50 million units. But it was far surpassed by the Sony PlayStation 4, which was also introduced in 2013 and sold 116 million units.

“We lost our footing in what the players wanted,” Stewart said.

After the backlash, Microsoft changed course. Nadella had just taken over and wanted the company to move from a software focus to cloud and subscription services.

Spencer emphasized that the development of the gaming division reflects those goals. He persuaded Nadella to buy Mojang in September 2014, which was the new CEO’s first acquisition.

“Games are more central to Microsoft today than they have been in our history,” Nadella said in an interview last week.

In 2017, Microsoft released Xbox Game Pass. For $10 or $15 per month, subscribers can play a select set of games for as long as they stay on the service. This upended the traditional model, with people paying $60 for games like Call of Duty and owning them forever.

To convince game publishers to put their titles on Game Pass, Xbox executives traveled around the world to meet developers and spread their vision of an industry where video games are cheap and easily accessible.

At first, developers were “cautious,” said Sarah Bond, a Microsoft vice president who leads the gaming ecosystem, as they feared losing money on the service.

So I decided to study how Game Pass affects the behavior of players. Microsoft said Thursday that it found that people using the service spent 50% more money on games and played 40% more games than non-subscribers.

There was initially a “fear” of subscription services, said Mike Blank, senior vice president of Electronic Arts, which put its games, such as Madden NFL and FIFA Soccer, on Game Pass in 2020. But he said the company was pleased with the results and “players are responding positively”.

Microsoft has also spent heavily on game development to expand its Game Pass offering, buying studios including the $7.5 billion acquisition of ZeniMax Media in September and adding hundreds of games to the service. This year, I also considered buying the Discord messaging app, which gamers use to chat while playing.

The diversification continued into late 2019, when Microsoft released its cloud gaming service, in which games are hosted in company data centers and streamed to devices. The service, Xbox Cloud Gaming, or xCloud means people don’t need to install games or use expensive hardware.

The idea for Spencer’s cloud gaming service crystallized earlier that year, when he was on a bus in Nairobi, Kenya, connected to a Wi-Fi network. He found that he could stream a game from a Microsoft data center in London to his phone.

“It was literally the same memorized game that I was sitting in in Redmond, Washington,” he said. “It really drives how you can make games truly global.”

Microsoft said Thursday that it is working with TV manufacturers to put its games inside TVs without the need for an Xbox. It added that it will soon bring cloud broadcasting to the console as well.

Currently, cloud games are still bogged down by the attractive gameplay and require a strong internet connection. Xbox Cloud Gaming is still in testing and Apple has banned the app from the iPhone because it includes a catalog of games, and Apple requires separate apps for each game as part of the app review process.

Meanwhile, Xbox continues to track Sony’s PlayStation. In April, Sony said it had sold 7.8 million new PlayStation 5 consoles between November and March, while analysts estimated that Microsoft sold more than 4 million new Xbox consoles in the same period. Sony declined to comment.

Some players said that Microsoft failed to win them over because it still lags behind Sony in high-quality exclusive games.

“I’ve always had the impression that PlayStation is better,” said Natalia Mogolon, a gamer known as Alinity who streams sessions on Twitch to her 1.3 million followers.

However, when Microsoft picks up on exclusive content, it can backfire. In 2015, when game publisher Square Enix released a popular game for the first time on Xbox, gamers were outraged that Microsoft would limit access to the title. The reaction was similar when I considered buying Discord, and when it was reported last month that the upcoming ZeniMax game will be an Xbox exclusive.

“It could look like a big company is coming to screw up and screw up their favorite game developer,” said Rod Breslau, a video game consultant.

As Microsoft has moved away from the console wars, Spencer’s tone has softened, too. In an interview with the New York Times in 2014, he indicated that he would not back down against Sony. “I’m in this to win,” he said.

In an interview last month, he took a different approach. “We don’t look at Nintendo and Sony and say the company has to lose in order to win,” he said.

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