Article : The State of Xbox

The State of Xbox

Gaming consoles have been around for decades and in that time we have seen a wealth of changes in how they are designed, marketed, and adopted. Yet, I can say with confidence we have never seen a console evolve over the course of a generation as greatly as the Xbox One. This of course is due to a number factors including decisions that date back to years before it even launched in 2013. The Xbox One’s market performance, combined with the growth of the gaming industry itself over the past several years, has led to significant organizational changes within Microsoft and how they invest in the Xbox brand. I’ve written previously about how Xbox was evolving with Phil Spencer’s promotion and the hardware refreshes in the Xbox One S and X, but even in the past two years, the division has continued to change drastically. With E3 2019 approaching and a new hardware cycle on the horizon, let’s take a look at where Xbox sits today.

The Impact of Game Pass

The introduction of Xbox Game Pass in Summer of 2017 was far more significant than most realized at the time. Merely two years later, it is still the only service of its kind and has been a catalyst for a tremendous amount growth in digital revenue for Xbox. Developers and publishers have also spoken highly of the service. With so many titles releasing regularly, curation has become increasingly challenging for platforms; with titles from smaller developers and/or publishers often launching unnoticed. With Game Pass, developers have spoken about how it’s not only helping their games get noticed, but it’s also increasing sales of the titles and their corresponding add-ons. With Game Pass subscribers playing about 40% more games than non-subscribers, it’s assisting developers in reaching more players. Once players discover a game and enjoy it, they will often financially support it. And as you would imagine, this has a profoundly positive impact on titles that require a multiplayer community as well. The data on these statistics is abundantly clear.

superdata subscribers
Courtesy of SuperData Research

Despite the impressive adoption and financial performance to date, Game Pass is still in its infancy. The longer term goals are far broader in scope and represent what I would refer to as a pillar for Xbox’s direction. Looking to the future, the Xbox team foresees Game Pass growing well beyond its traditional console and PC userbase, and eventually branching out to players on a wealth of devices. By doing so, Xbox can reach players worldwide who may not typically own an Xbox or gaming-capable PC. Phil Spencer, the Head of Xbox and Microsoft Executive VP, has been exceedingly clear in this regard.

“We want to bring Game Pass to any device that somebody wants to play on, Spencer said. Not just because it’s our business, but really because the business model allows for people to consume and find games that they wouldn’t have played in any other space. And while the Xbox team has committed to not only supporting the traditional console space with the most advanced hardware, it’s the games and digital services that truly generate the bulk of revenue.”

With Game Pass driving adoption and digital purchases, the Xbox brand has seen continued growth over the past several quarters resulting in fiscal year 2018 being the first time in the brand’s history it generated revenue in excess of $10 billion. The importance of digital services in this figure is particularly evident when looking at the 3rd quarter of fiscal year 2018. While year over year hardware revenue was down 17% (due to the launch of the Xbox One X in the prior year), total revenue was still up 8% due to a 31% increase in subscriptions and services revenue. And tying into that figure of course is the Xbox Live userbase which has grown from 52 million monthly active users to 63 million in that time frame.

“That is not where you make money,” Spencer said of consoles. “The business inside of games is really selling games, and selling access to games and content in means like that is the fundamental business. So if you open it up, the more often people can play, the more they’re enjoying the art form. It increases the size of the business.”

Even Microsoft CEO Satya Nadella has been promoting the performance of the Xbox division over the past 12 to 18 months.

“In gaming, we are pursuing our expansive opportunity — from the way games are created and distributed to how they are played and viewed, surpassing $10 billion in revenue this year for the first time. We are investing aggressively in content, community and cloud services across every endpoint to expand usage and deepen engagement with gamers. The combination of Xbox Live, Game Pass subscriptions and Mixer are driving record levels of growth and engagement.”

Next Generation Hardware

Naturally, with E3 2019 fast approaching it’s new hardware announcements that fans are most excited about. We are nearing the tail-end of the generation and that’s always an exhilarating time in the gaming industry. Sony officially kicked off the discussion several weeks ago with Mark Cerny discussing high-level hardware detail with Wired of what will presumably be the PlayStation 5. Naturally, this started the rumor mill churning at full speed on how Xbox would respond, particularly with Xbox leadership already stating they would lead the industry from a hardware perspective going forward.

Phil Spencer speaking at Xbox’s 2018 E3 Conference on next-generation hardware

At this moment in time pre-E3, all I can share is that Microsoft is taking a two unit approach to next-generation and they aim to maintain the console power crown. Presumably, they will aim both high and low in an attempt to capture both sides of the coin; those who want to upgrade into next-gen at a “reasonable” cost, and those who want the most powerful console hardware on the market. This approach would not only be unique, but given what we know of Sony’s PS5, it begs the question of “How is Microsoft ensuring they have the most powerful hardware?”.

The answer lies with AMD as they are building the chip sets for both the next PlayStation and Xbox(s). And so the question more accurately becomes “Where then does Microsoft hold the advantage with AMD?”. The question is a fantastic segue into what is likely the most important aspect of the future of Xbox as a brand: cloud services.

The Future is in the Cloud

During Xbox’s 2018 E3 conference, Phil Spencer spoke about Project xCloud and being able to play your games on any device and in any location. While at the time, the industry didn’t seem to take too much notice, a lot has changed over the last twelve months. Google ran a cloud gaming pilot through their Chrome browser several months ago and has now announced Stadia, a fully cloud-driven gaming service launching late this year. There have also been rumors of Amazon entering the gaming industry which, given Amazon’s reach, could certainly be a disruption as well. And regardless of which entertainment industry you look at, uninterrupted connectivity is rapidly becoming a consumer expectation rather than a dream.

Thus Project xCloud is hugely important for Microsoft and Xbox for a number of reasons. Some are obvious such as offering Xbox players access to their libraries at any time and remaining competitive in a rapidly growing market. But there are deeper, more significant reasons from a business perspective.

First, increasing the Xbox digital services revenue through new users becomes much easier when that user doesn’t have to purchase a new device. While I, along with many I know, love and adore our consoles, a very significant portion of the $140 billion (and growing) video game industry is generated through other avenues. With xCloud, Microsoft can offer the ability to join Xbox Live and Xbox Game Pass without needing to own a console or PC. Not only does this remove the largest barrier for brand adoption, it does so on a worldwide scale. As an example, Xbox has never been truly able to garner a foothold in Japan. However, the Japanese have a very strong affinity for mobile gaming (see the Switch’s recent, resounding success there). Xbox’s proposition can now evolve to fit the preferences for not only players in Japan, but throughout the world. They can offer access to hundreds of console quality titles to people through devices they already own, and they can do so for a low monthly rate.

“While our vision for the technology is complementary to the ways in which we use consoles today, Project xCloud will also open the world of Xbox to those who may not otherwise own traditional, dedicated gaming hardware. True console-quality gaming will become available on mobile devices, providing the 2 billion-plus gamers around the world a new gateway to previously console- and PC-exclusive content. We can achieve this vision with the global distribution of Microsoft’s datacenters in 54 Azure regions and the advanced network technologies developed by the team at Microsoft Research. We’re excited about our ability to deliver a best-in-class global streaming technology.”

(Phil Spencer on the vision for xCloud)

Secondly, and the aforementioned segue, is how the supporting infrastructure is being developed. As I mentioned earlier, AMD is developing the chipset for the next Xbox(s) but they also develop the chipsets for existing Xbox hardware and the xCloud Blades that power Project xCloud. This gives Microsoft a large competitive advantage in chipset development, both in cost and shared usage, and is an area in which they simply cannot be matched within the gaming industry. Meanwhile, in the cloud services segment, the development of xCloud on the Azure infrastructure can be dual-purposed with Microsoft’s core business services as well. It’s a win-win proposition on a global scale.

AMD CEO Lisa Su and Head of Xbox and Microsoft Executive VP Phil Spencer take the stage at AMD’s CES Keynote

Make no mistake however, it is not only Xbox that foresees a digitally connected gaming future spread across many devices. While the Xbox team is leading the charge due to their vision and resources, Sony and Nintendo are very aware of what they must do to stay relevant across all gaming channels in the future.

“I don’t want to put too fine a point on this because it might upset some of the people I work with, but I think effectively, we’re looking at kind of a post-console world where you can have quality gaming experiences across a variety of technologies. Sure, PlayStation 4 and PlayStation 4 Pro provide what, of course, we think is the best gaming experience, but the other consoles out there, be it Nintendo Switch, Xbox One X, or tablets, or phones — there are great experiences across all these. What we need to do is recognize all that. We’re not little gaming ghettos that are not federated or aligned at all. We’re all part of the same gaming community, we just come at it through different doorways. I think the future will be an extension of that metaphor. Your platform is not your hideaway. It’s just your doorway to all these other gamer folk.”

(Shawn Layden, CEO of Sony Interactive Entertainment, commenting to Game Informer on the future of PlayStation)

This direction has led to perhaps the most significant recent announcement in the gaming industry: a partnership announced by Satya Nadella and Kenichiro Yoshida between Microsoft and Sony for cloud-gaming collaboration. While Amazon Web Services are the worldwide leaders today in the cloud services space, that lead is shrinking and Microsoft is not only seeing exponential growth with Azure but has expertise in gaming that Amazon does not. With Xbox and now Google aiming for global gaming connectivity (in addition to the Amazon rumors), that leaves Sony looking to close gaps of their own.

Cloud Adoption2
Amazon (AWS) and Azure (Microsoft) are far and away the leaders in cloud services today

While we are not privy to the full details of this agreement, on the surface it makes a lot of sense for both companies. The benefits to Sony are clear. While PlayStation Now holds a majority stake of streaming revenue today (itself the result of Sony’s purchase of Gaikai in 2012), Sony simply doesn’t have the global infrastructure to deliver the services that Google and Xbox will be delivering in the near future. The scalability and reach of Azure, combined with Microsoft’s expertise, seem like a perfect compliment for Sony in this regard. Meanwhile for Microsoft, not only do they simply gain another customer on Azure which equates to one less for Amazon or Google, the companies will collaborate in other areas that will benefit Microsoft as well.

“Sony and Microsoft will also explore collaboration in the areas of semiconductors and AI. For semiconductors, this includes potential joint development of new intelligent image sensor solutions. By integrating Sony’s cutting-edge image sensors with Microsoft’s Azure AI technology in a hybrid manner across cloud and edge, as well as solutions that leverage Sony’s semiconductors and Microsoft cloud technology, the companies aim to provide enhanced capabilities for enterprise customers.”

Natella and Yoshida
Sony CEO Kenichiro Yoshida and Microsoft CEO Satya Nadella

Then it shouldn’t be a complete surprise that signs are starting to pop up that Nintendo is now considering using Azure to host their version of a streaming service in the future as well. I don’t have any details at the moment but again, this is an area where Microsoft is unmatched and so it would likely make the most business sense for Nintendo just as it has Sony.

Lastly and just to be clear before anyone panics, rest assured that traditional consoles will continue to be supported and likely will be the “best” place to play for some time. Phil Spencer commented on it directly during GDC earlier this year.

“I’ve been building consoles for 15 years – we’re not getting out of the console business, we spoke about it in our xCloud videos. We love our consoles, we love that business, and we’re super proud to have the most powerful console out on the market place today and that leadership position we hope to retain going forward. And I also believe your best premium experience is going to be dedicated hardware running under your TV in your living room. It’s an ‘and’ conversation, not an ‘or’ conversation. Everyone loves to jump to the death of consoles, and I think it makes a great headline, but we don’t think that way at all.”

Now, I can already hear it. I can hear the mantra that is chanted any time someone talks for too long about hardware and services. “That’s great, but it’s all about the GAMES!”. Ahh, there it is. And of course, while I jest, in the end it is about the games as a consumer. Fortunately for Xbox fans, there’s simply more good news awaiting them on that front as well.

Xbox Game Studios

When the revised investment began into Xbox as a brand, one of the immediate focuses was first-party game development. While Microsoft Game Studios was comprised of several major developers including 343 Industries, The Coalition, Rare, and Mojang, it was clear that they needed to expand their portfolio and fill some gaps that had plagued the Xbox One throughout the course of this generation.

Since early 2018, Microsoft has acquired seven more studios and created one more thus totaling eight new first-party studios. While impressive in its own right, what has often gone by unnoticed is the growth in investment into existing studios as well. From what I’ve been able to uncover, nearly every one of the first party studios is growing substantially. We’ve heard from some of the studio heads on occasion regarding this, and to date, the news seems extremely positive. Back in September, it was announced that Playground Games were in the process of hiring 177 new developers for a new open-world RPG project. This was later reported to be merely a piece of a hiring spree of over 600 total developers spread across the studios. Most recently, Brian Fargo, a developer at InExile, commented on their expansion since being acquired by Microsoft.

“Thanks to Microsoft, we’ve been adding incredible talent to inXile over these last few months. I’m seeing quality increase by leaps and bounds. The future is awesome.”

Further cementing the Xbox name was the recent rebranding of Microsoft Game Studios to Xbox Game Studios. While a small change on the surface, it signifies the renewed commitment to Xbox as a singular, global brand. As discussed, with the future lying beyond merely a set top box connected to a TV, global recognition of Xbox as a gaming access point and top-tier publisher becomes increasingly important.


Looking Ahead

Since the Xbox brand’s inception, there have always been questions as to why Microsoft didn’t invest more heavily into it. That discussion will have to wait for another time, but over the past two years or so, it’s become very clear that the question no longer needs to be asked. From the promotion of Spencer and extensive hiring, to the investment we’ve seen across all areas of the brand, Microsoft seems to have finally realized the potential of the gaming market. It has been, and will likely continue to be, a sight to behold.

I’ve been studying the video game industry for over 30 years now, and I believe this is the most interesting time in its history (likely since the crash of 1983 and the introduction of the NES to the United States). We are witnessing the complete transformation of the largest entertainment industry in the world. It is remarkable and it has only just begun. The days of gaming being a niche or locked to a box in front of a TV are long behind us, and some of the largest companies in the world are now racing towards the future state at a record pace. And Xbox, now finally having Microsoft’s full backing, is in the driver’s seat.

If you happen to be attending the Xbox Conference at E3 this year, be sure to find me! I love meeting members of the community.

By Ains

Founder and Editor-In-Chief: Seasoned Gaming. Avid gamer and collector. Plays a lot of Halo and Diablo. Find me on Twitter @Porshapwr.


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